Few positives to be found in negative gearing

Negative gearing and our pro-debt tax system may help the wealthier few but in the long run it could come back to bite us all. What's worse, the Reserve Bank is handicapped when it comes to guarding against this, writes Michael Janda.

Last week I wrote about the Bank for International Settlements' attack on its central bank members for their low rate policies.

In its annual report, the BIS warned that low interest rates were fuelling booms in financial markets and asset prices, even while lending to businesses and economic growth remained slow.

It called for central banks to stop printing money and start lifting rates back towards more normal levels now, rather than leaving it for later when a more severe and sudden adjustment may be needed.

But the BIS didn't lay all the blame for surging asset prices at the foot of the world's central banks.

"It also means designing a tax code that does not favour debt over equity," the bank urged in its report.

And Australia offers one of the best examples of a country where the tax system favours debt.

The prime culprit is negative gearing.

Usually only featuring in public debate in its real estate context, the ability to write of interest payments against other income is not just available to property investors, but also to shareholders, businesses and other investors.

But it's the real estate sector that probably generates the biggest threat to financial stability, and a drain on economic growth as investment is diverted away from businesses towards bidding up home prices.

The Grattan Institute estimates that real estate negative gearing costs the Federal Government coffers about $4 billion a year, which might fall to a saving of about $2 billion a year if it were abolished as people would change their behaviour.

But this figure grows strongly every year, as surging property prices mean ever more investors now make a loss on their investment property.

Property investment surge

The number of property investors has jumped from 1.3 million at the end of last century to nearly 1.9 million in the latest 2011-12 financial year tax statistics.

Landlords back in 1998-99 managed to turn a combined profit of $700 million. On face value, the new ones who have jumped in appear to lack the same financial nous, as their losses stand at just under $8 billion.

The vast bulk of those losses come from more than $24 billion in deductions for interest payments.

Let's face it, if you're paying more in bank interest than you're earning from your asset year after year - whether it's rent from property or dividends from shares - there's only one reason you're holding onto it, and that's capital gain.

When an investor buys an asset mainly for capital gain with little regard to income flows that is speculation.

When lots of investors do it at the same time, that is a bubble.

Excluding refinancing, housing investors now make up roughly half the new home loans being issued by Australia's banks.

That preponderance is also showing up in a shift towards investment loans as a proportion of outstanding home borrowing.

Starting at about 14 per cent in 1990, investors now make up more than a third of the balance of all outstanding home loans.

High income tax minimisation scheme

It's probably no coincidence that the big surge in investment loans came in the late 1990s, around the time the Howard government changed Capital Gains Tax rules to institute a flat 50 per cent discount in place of the previous indexation.

That's because it's been the interaction between the new CGT system and negative gearing that has created the opening for tax minimisation.

By itself, negatively geared property is clearly a bad investment - even though other taxpayers are subsidising your losses, you are still losing money.

But add in the prospect of capital gains taxed at half your normal income tax rate and the whole system begins to make more financial sense - at least while property prices keep rising.

If the rise in value is big enough, investors can stand to make a lot more from the low-taxed capital gains that they lost from their taxpayer-subsidised interest payments to the bank.

From a social equity standpoint, RBA statistics show that while 23 per cent of households in the top-fifth of income earners have an investment property loan, only 11 per cent of households in the next highest income bracket do.

For those on middle incomes, only 9 per cent have an investment property loan, and the proportion of investment loans for low-income earners is unsurprisingly negligible.

That shows negative gearing is overwhelmingly skewed towards lowering the tax bills of the relatively well-off, not benefiting the average mum and dad battler.

That is unsurprising, as it takes a pretty high income to be able to sustain all the interest-related losses on your investment property while you wait for its value to go up enough that you can flog it for a worthwhile tax-discounted capital gain.

In the long run everyone will lose

But back to the BIS and its financial stability focus.

From that point of view, the big problem with this tax system is that it encourages excessive household borrowing, subsidised by the public purse, and going into an asset class that does nothing to add to the country's productivity or economic outlook.

Australia's tax system, almost uniquely favourable to those borrowing money, means the Reserve Bank is handicapped in setting monetary policy.

In weak economic conditions, it cannot lower rates as much as it might want to encourage business borrowing and economic growth because it knows that housing investors will instead be the dominant borrowers to bid up home prices.

In stronger times, it cannot raise rates as much as it might if tax policies were different because Australian households are so indebted that even a small lift in mortgage costs might tip many thousands into default.

It also means that millions of Australians - both the negatively geared investors and the owner-occupiers that had to pay too much for their home because of competition from them - are vulnerable to the slightest economic shock because so much of their income goes towards repayments to the banks.

The winners?

In the short term, the banks that profit off the rising debt and the real estate sector that takes bigger commissions and bigger development profits out of the surging property prices.

That's why these two sectors squawk loudest when any changes to these pro-debt tax concessions are proposed, such as Paul Keating's attempt to wind back negative gearing in the mid-1980s.

But, in the long term, these sectors stand to join Australian property investors and homeowners as losers when the capital gains stop and the losses begin to bite.

Michael Janda is an online business reporter with the ABC. View his full profile here.

Comments (425)

Comments for this story are closed.

Peter of Melbourne:

07 Jul 2014 3:28:07pm

michael you are one of the few authors i actually pay real attention to in these forums.... what i would like to know is: how would you fix the mess of a system we have inherited through successive LNP and Labor governments over the decades?

i am forever seeing criticisms but it is rare to see actual realworld, not pie in the sky fringe group, achievable solutions to many of the problems this nation/society faces.

maybe that is an article you could collaborate on with some of your peers for future publication in a simple point system for us poor old souls without financial backgrounds

blax5:

07 Jul 2014 5:03:09pm

I am a greeat believer in gradualism and while I cannot claim to have all the answers, I would shave off a little from negative gearing.

The interest is regarded as costs of business and normally that is fine. What is not fine is non-deductability of childcare fees as cost of business, abuse by a multi-national company like taking out an inhouse loan to shift profits in form of interest overseas, and buying businesses with a 70 % loan. The latter only makes the banks rich and is a fair weather structure, toppling over as soon as one variable in the equation changes.

If negative gearing is a problem apply gradualism and shave off just a little, maybe a little more in three years. Any anomaly needs addressing but not in a way that provides shocks.

If or when there is downward movement on wages there will be a decrease of investors.

RoxyR:

Bill:

07 Jul 2014 5:54:55pm

It is not just investors that would be hit you would hit all home owners as the price of all real estate would fall. Nothing will be done about negative gearing until renters outnumber home owners + home lenders because people in this country only think about themselves. This time is coming soon though as renters make up 30% and are rapidly increasing. I would say to people if you cant afford a home refuse to take a mortgage and minimise your rent then vote out the home owning aristocracy.

FedUpExpress:

Negative gearing in Australia was aimed at the idea of owning ones own home, and the Australian dream of equality for your hard work to put a roof over your and your familys head.

Rent seeking has become the long term and unrectified consequence.

And indeed, counteractive to housing the country's inhabitants.

2008 GFC was based on this 'hedge betting' of this over inflated sector of the market. Particularly from the US. But thats a longer story to explain.

Essentially high financers playing musical chairs, all betting on who could not afford to pay back their loans. And who would get stuck with the defualts on them, and no longer get the interest rates of repayments once the defaults began to occur.

Here they are betting on the same thing. Hoping interest rates wil RISE, and reap a huge windfall. And to have offloaded any potential defaulters to others if they don't. That's why government policy is important to the population it 'governs' for. Because high finance could care less about housing a county's people. However, our government/s should, and adapt accordingly to do so, as it is in fact, their portfolio area of responsibilty to regulate policy for its peoples. Not for vested interests whom are not.

AJP:

08 Jul 2014 8:02:09am

Negative gearing has nothing to do with owning "ones own home". By definition it applies to an investment property. Home owners do not get to claim their interest expense (or any other household maintenance costs for that matter) as a deduction to reduce their taxable income.

The real problem with the current tax treatment of investment properties are not the deductions per se; it is the ability for investors to sheet these deductions home against their personal income tax. Investing in property (whether it be a residential or commercial property) is a business afterall. However subsidizing an investment which runs a loss in perpetuity (which is what this debate is about), and the consequences this has had on the domestic housing market is a national disgrace.

Karl:

08 Jul 2014 8:23:39am

Very true.If negative gearing could only be applied against income generated by the investment it is taken against and only for new build (or new share issue), then I might agree with its limited usage.

v:

08 Jul 2014 1:38:40pm

FUE,

"Negative gearing in Australia was aimed at the idea of owning ones own home,"

Who told you that?

Home owners are ineligible to "negative gear" their homes. Negative gearing was inttroduced by Tories in order to make it easier to make money from speculative investment in residential real estate. Under the scheme, working Australians subsidise the renovation and capital improvement of "investment properties" (aka gambling chips).

Negative gearing simply takes home ownership out of the reach of the majority of Australians and, if allowed to continue long-term, will turn us into a nation of tennants, and our landlords will live overseas.

Sydney Bob:

08 Jul 2014 9:28:51am

That is the real tragedy in this story. Negative gearing has pushed up the cost of property so that young people a locked out of the property market. It means these young people cannot save for their eventual retirement.

So we have an aging population and younger generations who are paying rent.

blax5:

08 Jul 2014 10:28:02am

I come from a renters' country; in my youth in a city practically nobody owned their own home. It creates a vastly different society which was/is actually a lot more selfish than Australia. When people deplore less participation in clubs and political parties that has something to do with a renting society, too. Why spend time and money to go to meetings when you ought to save money by maybe cooking your meal or some such like, or make an extra $.

When somebody wanted something for nothing, people used to say 'I have to pay rent, too.' Volunteering was unheard of although we could read about it in the newspapers when there was some natural disaster in the US. A renting society also needs more job stability = less flexibility, which is the opposite of what people strive for here. In those phases when people have to find another job they could easily be faced with being tossed in the street if that phase is longer than they can keep up rent payments.

I would say that you ought to be careful what you wish for. Reglementation and rules in rented housing is quite a bother, too, close to a psychological burden.

WA IDeas:

08 Jul 2014 12:04:13pm

"It is not just investors that would be hit you would hit all home owners as the price of all real estate would fall."

That is not really a problem as real estate in Australia is grossly over valued in any event, particularly when comparisons are made with other first world countries that have been around for 1000 + years longer than we have, that have much lower property prices!

Aside from the above, unless you are going to try to sell your property during a downturn, you're not 'losing' out as you are only losing value on paper. If it is your home that you intend to live in for some time, then you're not losing at all. An unrealised loss is not an actual loss...

Bill:

v:

08 Jul 2014 1:41:08pm

Bill,

"It is not just investors that would be hit you would hit all home owners as the price of all real estate would fall. "

The rise and fall of house prices is of no concern to genuine home owners. As a matter of fact, genuine home owners are better off with lower, rather than higher, house prices because this keeps their council rates liability down.

The house you live in is always worth exactly the same: it is always worth precisely one home. If the price of your house goes up, there is a very good chance that the price of the house you would buy if you sold yours, would also go up. You cannot realise the "value" of your home in dollars without accepting homelessness as a consequence.

The big problem with our hopelessly inflated house prices is not that it disadvantages those who already own homes, but that it places insurmaountable barriers to entry in the way of young Australians looking for their first home. Well, that's ONE of the big problems anyway. The worst effect of a housing market is that it diverts billions of dollars from productive investment into speculative investment that produces absolutely no wealth.....but that's another story.

Tenant:

Bill:

08 Jul 2014 4:04:13pm

The wealthy will own all the houses, that is the trend. For example in Latin America the average working income is $95US a week and rental averages are $132US a week meaning that it takes more than one wage to pay your rent and home ownership would take a few thousand years of %100 saving. But home owners get more than average salary just for renting out a house and this can be used to buy another.

Marty:

v:

08 Jul 2014 1:11:28pm

RoxyR,

"I see one difficulty though, those 1.9 million investors vote."

And they will always vote for the Tories. But there are millions more voters who actually work for a living and, in most cases, do not realise that they are effectively carrying the 1.9 million investors AND the foreign corporations who own almost all of the shares and control our economy. There may be 1.9 million "investors" in Australia, but their holdings represent less that 5% of the total value of listed companies.

The simple fact is that anyone who is not one of the 1.9 million parasites, but votes for the Tories is effectively not only cutting their own throat, but stabbing their fellow citizens in the back. You can understand some of the 1.9 million voting for the Tories because they seem to cater to their short-term interests, but why anyone who works for a living would vote for a party that favours the interests of foreign corporations over those of Australian human beings is beyond me.

Australia has been periodically afflicted with Tory governments because a hell of a lot of Australians who work for a living vote for a party that promotes the interests of foreign corporations over their own and those of their children. The rest of us have every right to be very, very annoyed at their irresponsibility.

Marty:

08 Jul 2014 2:33:34pm

Pretty sure you will find that a large number if not the majority of investors using negative gearing actually work for a living , it is not all high rolling business types it is often mum and dad investors , many possibly vote ALP , Greens etc as well

LeftRightOut:

07 Jul 2014 5:40:30pm

blax

"If or when there is downward movement on wages there will be a decrease of investors"

You obviously missed the point about who is investing. It's predominantly the wealthy, not the average worker. Downward pressure on wages generally has more impact on the spending habits of low to middle income earners than the top end.

Blzbob:

07 Jul 2014 6:11:59pm

Negative gearing is no more than a scam for the wealthy.Just get rid of it outright. the only ones that will lose are those who already have plenty. prices of businesses and properties would fall to their true value and scammers can declare bankruptcy and go directly to the bottom where they can start again under the same rules everyone else had to live by.their businesses and assets would be put up for sale at a sensible price where they could be bought by someone who will happily pay their tax for a change.

DethLok:

Karl:

08 Jul 2014 8:26:47am

A rort legislated into the Tax Act is good reason for intelligent people to call for its scrapping.Negative gearing only for new build.Let us help the building industry by creating employment with debt.

AE:

08 Jul 2014 12:14:28pm

No, the building industry got a huge free kick with that bogus "school halls" rip-off, charging way over the odds because it was a guvvament job. Let the building industry profit using its own abilities, not gifts from the guvvament (paid for buy us who pay tax).

WA Ideas:

08 Jul 2014 12:28:58pm

"A rort legislated into the Tax Act is good reason for intelligent people to call for its scrapping."

So how do you propose businesses fund the daily activities of their business? such as paying wages and for supplies etc without using some degree of debt funding to ensure sufficient cash is available as and when required.

Anyone that has run a business will tell you that you can't rely on your clients to pay you on time, every time. So there is a need to have overdraft and drawdown facilities to ensure staff get paid and the business can continue uninterrupted. Such facilities charge interest and that interest is properly deductible.

Specifically in relation to property investment, perhaps if the legislation did not permit the revenue losses to be offset against other income, but rather the interest be deductible against the rental income and any excess be carried forward as a loss that can be offset against future rental income when the property becomes positively geared (i.e. deferring a portion of the deductions to future income years).

Mart:

08 Jul 2014 2:08:20pm

"How are businesses to guns the daily activities of their businesses?"

By being a going concern. If they can't without negative gearing they should be out if business. Negative gearing (to me) only rewards poor business decisions. It is only scheme I know of where you get a reward each year, every year you make a loss on a losing business.

It is nothing more than a prop for poor property buying decisions. Property prices would reflect their true value if the purchaser wasn't going to get a handout in the form of my taxes for eternity. It is purely a tax dodge made legal.

Negative gearing might match its propaganda if it only applied to new property and for five years. Then it might actually prompt growth in rental property to house the nation.

Mark James:

Susan:

08 Jul 2014 7:46:06am

LeftRightOut, I would dispute your statement. There are plenty of 'mum and dad' investors who are buying one house to save for their retirements (after all, after paying tax all your working life, you can't count on getting a pension - so you really have to plan for your own future). I think the REAL pressure on real estate prices is coming from the unfettered overseas investments. Non-residents buy properties, rent them, don't pay tax in Australia, therefore don't contribute to the infrastructure required to service that property, and we would apparently prefer that to allowing residents to plan for retirement? Negative gearing is nothing more than shifting the tax burden. If I buy a house now and enjoy the tax breaks, when I retire that house will be paid off and will be my source of income instead of drawing on a taxpayer funded pension. What is the problem?

Blzbob:

08 Jul 2014 8:24:38am

Susan I agree, but to own a whole street seems to be overdoing the retirement income thing.Perhaps it should be capped, besides if you are earning enough that you are paying "too much" tax then you really don't need to be subsidised with negative gearing.

Heretic:

WA Ideas:

08 Jul 2014 12:31:31pm

"Foreign real estate investors may be driving up asset prices but they can't benefit from negative gearing if they pay their taxes abroad."

And add to that, under all of the double tax treaties that Australia has, all profits realised on the sale of real property are taxable solely in Australia, so there's no issue with foreigners selling up and Australia losing out on the tax payable...

LeftRightOut:

08 Jul 2014 1:20:02pm

Susan as per the article:"From a social equity standpoint, RBA statistics show that while 23 per cent of households in the top-fifth of income earners have an investment property loan, only 11 per cent of households in the next highest income bracket do.For those on middle incomes, only 9 per cent have an investment property loan, and the proportion of investment loans for low-income earners is unsurprisingly negligible.That shows negative gearing is overwhelmingly skewed towards lowering the tax bills of the relatively well-off, not benefiting the average mum and dad battler."

My statement was also in relation to wages / income. The average family would struggle to buy a home plus an investment property. Yes some do, but the majority on investors are on above average income. When there is pressure on wages, it is often felt most by low income earners, as their budgets are generally tighter.

So while there are some 'mum & dad' investors, the reality is that these would be middle income or above. Those on above middle income pay a higher percentage tax on their higher earnings, so any negative gearing is more beneficial to them. Therefore the tax is skewed to the benefit of the middle and upper income earners.

Property prices are a related issue but negative gearing and international investments are only components. You may also consider cheaper and easier loans, first home buyers grants etc. which all impact on the market.

David:

08 Jul 2014 8:59:51am

Wrong, negative gearing is being used by working class mum and dada investors, blue collar tradies etc, with leveraged program's you don't gave to be wealthy, that is the attractiveness of negative gearing, almost anyone with a steady income can participate.

Whether this is right or wrong is not the point it is legal, and is applied to other sectors as Janda points out, except that it does increase prices I. Shares etc, Janda should know that any additional funds invested in shares increases prices until people choose to remove their funds at which time prices fall, that's how shares operate

WA Ideas:

08 Jul 2014 12:11:10pm

"You obviously missed the point about who is investing. It's predominantly the wealthy, not the average worker."

That's not an accurate statement at all.

As a result of the rapid growth in wages in the mining sector, in WA there are an ever increasing number of people who are not 'wealthy' but have a relatively high income and have been advised by financial planners to invest in property to build wealth for their retirement. By way of example, I know of a mid twenties girl who does generic admin for a mining company and earns $140k pa, with no formal qualifications or special skills, and has purchased 2 houses, 1 to live in and 1 to rent out as an investment.

rattan:

v:

08 Jul 2014 1:02:17pm

blax5,

" What is not fine is non-deductability of childcare fees as cost of business"

You have touched on what should be a VERY sore point with all Australian citizens.

When a company is taxed, it is taxed on its NET income (revenue minus operating costs), but when a human citizen of the Commonwealth is taxed, he or she is taxed on his or her GROSS income (total income INCLUDING operating costs).

Companies produce products. So do human citizens of the Commonwealth. Our product is called "human labour power" and the "input costs" of human labour include ALL of our living expenses (food, education & training, accomodation & security, leisure, cultural enrichment, healthcare etc). These are the production costs of human labour and, if we were treated with the same gentle consideration shown to foreign corporations, we would only pay tax on the fraction of income that exceeds the average cost of living.

It is galling for anyone who really cares about being human, or being Australian, that our society affords to foreign corporations rights and privileges that are denied to its own, human citizens. We really need to get a grip on ourselves and remember what we have an economy for and why we tolerate the existence of companies and corporations in it. Corporations are supposed to serve the needs and wants of HUMAN citizens not the other way around. While we continue to place the whims and demands of business above the rights and legitimate interests of human beings, stupid contradictions will persist and become progressively more difficult to ignore.

Aussie Sutra:

08 Jul 2014 10:52:53am

We need a graduated system of Capital Gains tax. Starting at 100% for gains made in the first two years, and dropping by 10% every year after that the person holds the property. This would discourage house flipping, which is pure speculation, and it would encourage those who have been sitting on property for far to long to get those properties back into the market.

Negative gearing needs to be phased out over a period of about five years.

say what:

08 Jul 2014 12:40:08pm

Thank you Michael Janda. I'm feeling vindicated!

A few months back I had a lot to say about Negative gearing...and it wasn't positive. One of the usual conservative contributors. Perhaps one of the 'I must make it be known I'm a lawyer' guys aggressively rebutted my comment with the response of "do you even know what negative gearing is?"

But my point was obvious, and not argued on the strength of my taxation law knowledge (yawn), but rather, the antidotal evidence that exists in the aftermath since its implementation.

It goes without saying that negative gearing has done more harm to the livelihoods of ordinary Australians than any single tax measure. And as Michael says, it costs us a fortune in lost tax revenue..

So Peter I agree. No point in trying to perform a post mortem on this. Although it has to be said that Howard's dirty hand prints will be found all over it. What can be done to bring it back to a reasonable and fair place? Who will be gallant enough to take this on?

v:

08 Jul 2014 12:49:00pm

Peter,

"the mess of a system we have inherited through successive LNP and Labor governments "

The fact that neither Labor or Tory governments have been able to "fix the system" suggests that, despite their differing ideologies, governments are not free to reform the tax system or economy in whichever way they like. But I think that the stark ideological differences between Labor and the Tories does make a difference in terms of which side is more likely to "fix the problem" if they could.

There is no conflict between the ideology of the Tories and the "mess of a system" we currently have. Tory ideology rooted in the divine right of business to do whatever it pleases and the absolute responsibility of human beings to facilitate that. Provided that their donors are making megabucks, everything is fine. That is why Howard happily presided over the "Bottom of the Harbour" scheme in which hundreds of viable Australian businesses were destroyed and asset-stripped for tax breaks, sending billions of dollars of revenue overseas. It was only after the election of Bob Hawke that this criminal rorting was brought to an end.

There is, however, quite a conflict between Labor ideology and the current "mess of a system". According to Labor ideology, there is a difference between speculative economic activity and productive activity. Productive activity is good because it returns a benefit to society in the form of increased wealth. Speculative activity is bad because it simply moves wealth from one place to another without creating anything at all. Income derived from speculative activity has to be generated by someone else who gets no benefit from their efforts.

Labor has not been able to change the system simply because we have not supported their attempts to do so. Our cowardice in the face of bullying from overseas press barons and our inexcusable failure to use our own intelligence has effectively neutered any attempt made by a Labor government to reduce or eliminate idle speculation as a source of income.

Negative gearing would be a thing of the past if we had supported the Hawke government's efforts to get rid of it. We would already have a carbon trading system in place if we had the guts to support our government when it takes actions inour interests. We would have a much stronger and more widely based super-profits tax that would prevent the loss of billions of dollars each year paid in dividends to foreign shareholders, but generated by Australian labour-power.

You don't really need to ask "what would you do?" because we already know what Labor would have done had they had us behind them.

Mongo:

07 Jul 2014 5:00:25pm

Perhaps you won't be a loser in this Janice, except in terms that because so many people ARE using negative gearing to help pay off their investment, it drove the price of housing stock up and as a consequence, you probably paid more for your properties than they would be worth otherwise. But as you own them and have retired your debt on them, if the bubble bursts you won't really be hurt by it.

Of course, it isn't the risk of the bubble bursting that is really the issue here, it is the ongoing impact of lost revenue to government. I actually think that negative gearing isn't all bad, as it allows people like yourself to ultimately build a portfolio of properties and reduces the cost of retirement.

On the other hand, allowing negaive gearing on existing housing stock is essentially parasitic in nature. Those with wealth invest in something that everyone needs, driving up its value. None of the wealth generated for the investor comes from building anything. The losers are those trying to get out of renting and into buying.

However, if negative gearing was to be phased out on existing housing stock and limited to new properties, and then only for a set period after construction (say 10 years), the investment in real estate would actually achieve something- the growth of new housing stock.

Of course, that would lower the value of the existing housing stock. More people would get out of the rental market and into their own property. That indeed would make rents drop.

Which, I guess, drives those with a vested interest in maintaining the existing system into criticising those advocating reform...

Toc:

08 Jul 2014 7:23:30am

They could live in their own home if they could afford it and while we have a government intent on driving us back to the 50s, that would be affordable on one median income.

As for Janice, she is an investor. Nothing wrong with that but she is in the market as it is. Markets change. If we get rid of negative gearing, (and I don't think we can), (but we can certainly tax profits correctly), and house prices fall, thus driving rents down, she will suffer. That can happen in a market. I hope for Janice's sake she has other investments.

Aussie Sutra:

08 Jul 2014 10:55:03am

The system in Australia REMOVES houses from the rental market. So both the increased availability of rental properties causing lower rent prices and the affordability of properties to buy would make all people who now rent much happier.

John S:

08 Jul 2014 12:52:23pm

For expenses on a house to be tax deductible, it needs to be available on the rental market. Many comments on this article seem to assume that investor owned properties go into some black hole of unavailability, but this is not the case. Sure, it may not be economical for an investor to sell a house, due to CGT, but it will still be putting a roof over someone's head.

v:

08 Jul 2014 4:23:54pm

PW,

"What do you suggest renters do, Mongo?"

Well, if negative gearing were abolished, the speculators would desert residential real estate faster than rats can escape a sinking ship. This would cause house prices to fall dramatically to more natural and sustainable levels and, hey presto! all of a sudden a whole lot of "renters" would be in a position to become "owners". This would greatly reduce the demand for rental accommodation and, as a consequence, drive down rents for the remaining "renters".

You see, there is a housing shortage in Australia, but this housing shortage is not the result of a shortage of houses. This may seem contradictory and it is. And that is how you know that a system is broken - when it produces contradictions. It is a result of the "fat famine" effect, which is just one of many shortcomings of the capitalist system. Believe it or not, when the Irish Great Famine was at its worst, Ireland was one of the largest exporters of wheat in Europe. There was no shortage of food in Ireland, it was just that the Irish couldn't afford to buy it.

We are in a similar position in Australia. While plenty of people who wish they could afford to be "renters" sleep under bridges and on park benches, tens of thousands of perfectly liveable residential properties lie empty because their speculator-owners can make more money by leaving them empty than they can by renting them out at affordable rents. It was a similar situation in the Great Depression when tens of thousands of hard working Australians were reduced to sleeping rough on streets full of empty houses - all owned by the banks.

Negative gearing is a major market distortion and it has major negative consequences including homelessness, unaffordability of home ownership and, most seriously, it starves our industries of the funds they require for PRODUCTIVE investment, forcing them to seek investment from overseas.

Speculative investment always has a profoundly negative effect on the economy because it takes resources away from productive investment. But speculative investment in residential real estate does not just ruin the economy, it also makes housing increasingly unaffordable for an increasing number of young Australians. Negative gearing encourages this socially and economically destructuve practice and, for this reason alone, it must go.

barsnax:

07 Jul 2014 8:15:13pm

We have a treasurer with a multi million dollar property portfolio, we have developers in cahoots with politicians via donations. I don't think much will change while we have this current bunch of people running the show.

v:

08 Jul 2014 4:30:12pm

barsnax,

"We have a treasurer with a multi million dollar property portfolio, we have developers in cahoots with politicians via donations."

We have a Treasurer who is the Member for North Sydney, and whose election campaigning has been funded by the "North Sydney Forum" and the "Free Enterprise Foundation", both of which have been identified by ICAC as funding fronts for the Liberal Party, designed specifically for the purposes of laundering donations from questionable and even illegal sources.

And we have a Prime Minister who had to borrow $700,000 from a bank (which one?) in order to cover "living expenses" when Howard lost office, who is still up to his eyeballs in debt, and who is fanatically resisting any efforts to place the banks to which he has such a heavy obligation under scrutiny.

It appears that this government is attempting to rewrite the book on "conflicts of interest".

Realist:

08 Jul 2014 8:52:15am

How does negative gearing 'help pay off an investment'?

All negative gearing does is allow the loss made on a rental property to be tax deductible.

This is similar to any other asset class other than the private home. The costs incurred in generating the income are tax deductible. A private home does not generate an income so there is no eligibility for negative gearing.

Furthermore, profits generated when the rental home are sold are subject to capital gains tax. So no one is escaping tax at all.

It seems that the strongest critics of negative gearing have no understanding of what it actually entails and no initiative to find out.

Curious party:

08 Jul 2014 10:48:24am

Realist:

The way that negative gearing helps them to pay off the cost of the mortgage is because they can write off the lost income from the investment property against the taxes they should be paying on other earnings. So instead of paying their fair share of taxes, they are instead putting that money into ownership of an asset.

If we abolished negative gearing or amended it such that the lost income from the investment property was only deductible from the taxes paid on the income from the investment property, then a whole lot of people would no longer be able to afford their 4 investment properties as they would actually be paying tax on their other income.

BTW, capital gains tax is around half the rate of tax paid on standard income. So even if people are paying tax when they sell the property, it doesn't make up for the amount they have dodged (especially when you consider that they would surely only be liable to pay the difference in value between the original purchase price and the sale price).

For someone who accuses other people of limited understanding you seem to be demonstrating a high degree of wilful ignorance as to the real mechanics of negative gearing.

Rodrigo:

John S:

08 Jul 2014 12:59:44pm

The 50% on CGT is a concession to allow for the fact that all that income will be taxed in a single year, where it will be levied at a higher marginal rate. Someone selling a house and paying CGT on its inflation will also miss out on all the mean-tested middle-class welfare for that year.

The previous system had a different system to avoid the issues of marginal rate, but it created messy side-effects where your effective marginal tax rate could exceed 100% at some income points.

AE:

v:

08 Jul 2014 4:38:52pm

Realist,

"How does negative gearing 'help pay off an investment'?"

Well, it is quite simple.

You buy a cheap house and rent it out to a relative for a peppercorn rent (on the grounds that it is not a very good house and it cannot attract a high rent). Then you throw heaps of money into renovating it, which you can claim as a tax deduction, and dramatically increasing its market value. You then sell the house and pocket the profit at taxpayer expense.

This makes idle speculation in real estate a more lucrative and far more secure option than investing your money in a productive enterprise that actually contributes to Australia's wealth rather than simply shifting it around. Banks would rather lend money to real-estate speculators than to genuine investors because they see the risk as lower and the returns higher. We need to fix this. A shortage of investment funds for productive enterprise and an over-reliance on foreign capital are both far more serious threats to our national sovereignty than ten thousand leaky refugee boats could ever pose.

Pete:

07 Jul 2014 5:09:23pm

The article's obviously not about the minority of investors like you who pay the property off before owning. The losers are the majority who are sitting on unrealised losses, subsidised like you by the taxpayer. In fact, if you understood capitalism, you'd realise schemes like negative gearing are its antithesis...socialist subsidisation is what it's about, although in this case it tends to benefit the well-off, not the poor. Negative gearing should be removed, both for 'capitalist' reasons, and for the fact it's welfare for the rich. The government would do it tomorrow, but is afraid of wrecking people's savings for retirement. A slow ramp down is the best solution, but that takes more than one election cycle, so the government aren't interested. Another baby-boomer legacy for our kids to deal with eventually.

janice:

07 Jul 2014 5:31:26pm

"subsidised like you by the taxpayer"

I'm a taxpayer

The government gains also by not having to provide housing nor fund development, since developers know that investors will invest as they can offset some of their interest payments using negative gearing

Investors pay tax .. so it's their money as well, you make it sound like someone else is funding it

phase out negative gearing:

07 Jul 2014 5:44:46pm

Hi Janice.Like a lot of investors, you do not seem to understand that that negative gearing claims are a claim against Treasury Revenue.Other taxpayers are subsidizing investors to lose money in the hope they will make a capital gain.It is legislated gambling by another name.Phase out negative gearing ASAP.And while you are at it, how about a Royal Commission into the FIRE economy and it nexus with government bodies.

Aussie Sutra:

Pegaso:

07 Jul 2014 9:11:46pm

Janice, would you have invested in those 11 properties if you were not able to negatively gear?Other taxpayers,your renters, who most likely have no access to tax minimisation schemes, have enabled you to emerge from negative gearing.

CF Zero:

08 Jul 2014 8:12:28am

Are you or were you? You have grown your portfolio using tax payer assistance, would it have been a viable strategy without this assistance?Did you build these 11 homes or did you take out loans on existing properties?

Leftwingdroners:

07 Jul 2014 7:06:24pm

If you really have such a problem with a cost of business being a tax deduction, then lets remove it.

But at the same time, you can't keep continuing to tax the income from that investment, or the government would then be double dipping, and there would be little incentive for investors to provide rental properties.

Great, you say, house prices will fall, and everyone will own.

Yeah, right, except for the unemployable, the unwilling to work, the unwilling to save, and those who are unable to work. Who are now left with little option but to fall back onto the public housing purse.

So why not this win-win situation?

Please, the jealousy against those who are doing something to move ahead (and negative gearing is just that.....the investor is putting in their own money to provide housing to others, along with a contribution from government in the form of a tax deduction, in the hope of later capital gain, exceeding the value of money invested, which by the way, is taxed), is nothing more than a tantrum from those who cannot do it themselves.

a taxpayer:

08 Jul 2014 9:08:36am

10 out of 11 investment dollars is used to buy existing dwellings.I am not jealous of so-called "investors" using skewed tax advantage to force potential home buyers to the sideline.I think negative gearing in its current format is just rude.There are now more than 1M renters wanting to buy a home, but thanks to negative gearing, they stand little chance.The real tantrum would come to light in the form of investor outrage if any govt actually ended the Age of Entitlement, inclusive of ending negative gearing.

Aussie Sutra:

08 Jul 2014 11:03:48am

Which is why people like you who are using real estate as an asset class are the real leeches on our society. You do nothing to help support the needs of society, and only what makes you richer. That's fine, but I for one don't want to pay taxes to subsidise you for doing it, and since the objective of negative gearing was ostensibly to provide housing for the VERY people YOU despise, it obviously does not work.

Weevels:

Ann:

08 Jul 2014 1:47:34pm

Get real, janice. I am part of working couple with no kids. We have never been turned away from a rental and have a great record.

But unlike some people, I am not a heartless leech and recognise that some people are always going to be bogans and they need housing too - and you won't do it, the government has to do it, so stop pretending you are "lifting the load" from the govt.

You will only accept people like me - you will never take the truly pathetic.

AE:

Getreal:

07 Jul 2014 6:51:15pm

Janice, you may say that this is anti-capitalist dribble, BUT negative gearing and CGT discounts ARE socialist policies! Please, you represent the stereotypical property "investor". Thinks they're smart when in fact just products of an inevitable and cruel social system setup for you at the right time. Property prices WILL decline, believe it or not.

cuteyoungchic:

07 Jul 2014 9:19:33pm

Negative gearing on residential rentals exists for one reason, and one reason only.To save the government from having to provide all that housing to tenants. If the government provided all that housing, who do you think would pay then? You ALL would!!!So take your pic people. Would you rather our suburbs be full of state housing?I think not.

Curious party:

08 Jul 2014 10:57:10am

Facile argument cuteyoungchic - there wouldn't be such a demand for rental properties if negative gearing didn't drive such a housing bubble.

And in any case, the taxpayer is still paying for all of those housing costs to the tune of $4 billion lost every year due to negative gearing. The difference is that instead of the housing assets being accrued by the government (as it is under public housing) it is accrued by the wealthy.

I'd rather have suburbs full of state housing (you elitist snob) rather than suburbs that are completely off-limits to a large proportion of the population because housing and therefore rental prices are continuing to skyrocket.

moochsmooch:

Ann:

08 Jul 2014 1:50:06pm

"cute"youngchic - what's wrong with state housing? Oh, what's that? The people that use it are socially undesirable? Well, where do you think all those socially undesirable people go when private investors buy up properties and make the place "respectable" by only renting to nice people?

Do you think they just fall into a hole in the ground and die? Nope, they state housing is just MOVED somewhere else, and we STILL pay for it with our taxes.

The only thing this crazy real estate pricing has done is price many young couples that would have bought out of the market and forcing them to rent to pay money to investors - why do you think new home buyers are at a historic all-time low?

Curious party:

08 Jul 2014 11:00:09am

Graham H:

Or you could just kill off the ridiculous scheme that makes investing in 14 properties possible in the first place. Then the government could still reap the winfall in CGT takings and the property price would still drop suitably because all of the people who overcommitted on the basis that they prefer to invest in property rather than pay tax on their income would all be forced to sell when they can't afford to pay tax before paying their mortgages.

Aussie Sutra:

08 Jul 2014 11:14:16am

Really? Maybe it would be even better then if all Australians negative geared five or ten or twenty properties each? Then we could have the giant ghost cities they have in China. Nothing stupid or unsustainable that I suppose.

CJB22:

07 Jul 2014 9:16:24pm

Yes Janice, you pay taxes so in part you are subsidising your own investment. The problem with it is however that the majority of those who are benefitting from the current situation are those who are already wealthy and Mr and Mrs average, ie. the bulk of taxpayers, are footing the bulk of the bill. There are 3 things that will help our society reduce many of its social ills. 1. Is a stable family unit, 2 is a job and 3 is everyone being able to afford their own home. Notice the word home as opposed to house.

janice:

So really your problem is with "wealthy people" getting something you aren't?

Those "wealthy people" are just like you and me mate, except some of us taken some risks and worked hard to get "wealthy".

Social ills, seriously?

Social ills like me subsidising Rudd's $1,000 giveaway?

Or the $8Billion spent on overseas aid, so Australia could sit on the security council, for no good reason

The RGR governments wasted over $400B in 6 years, and our interest bill per year is over $12B now

But your problem is social ills befalling us .. and you distill that to being people who risk their own capitol to provide housing who get a minor benefit on the way from negative gearing their investments while the income is less then the outgoings?

Get some perspective .. it's all too easy on the Drum to spew hatred of anyone who is different to you

Maybe your life decisions are your problem, sounds like you might be regretting some of them?

Weevels:

Ann:

08 Jul 2014 1:55:26pm

Janice we don't give a fig for wealthy people getting someone we don't.

We give a fig for the fact that we CANNOT buy a home. We can't - a childless couple working median wage is simply not in a position to own a home. The banks turn you away or put you on predatory 30-year loans that would bankrupt you if anything went wrong.

That's what we care about. YOU are forcing ME to go homeless. I don't care how rich you are. Just stop making me rent when I want to buy!

v:

08 Jul 2014 4:55:41pm

janice,

"I'm a taxpayer"....whopays less tax than she should as a resuklt of being subsidised.

Well janice - I am one of the taxpayers who subsidises your lifestyle, and I would prefer that my taxes were spent on building a better Australia than on inflating your ego. Perhaps you should show a little more humility and a whole heap less self-congratulation.

v:

"In fact, if you understood capitalism, you'd realise schemes like negative gearing are its antithesis...socialist subsidisation is what it's about"

I agree with most of what you are saying, but you need to be careful with your terminology.

There is nothing "socialist" about governments giving OUR money to real-estate speculators. This is corruption and has nothing to do with ANY political philosophy.

When the colony of NSW was established, a small class of failed British aristocrats were heavily subsidised by the Crown. They were given land and convict slaves and they became very powerful. By the time Bligh became governor and started to attempt to build a cohesive and resilient society with a currency, an education system and a health system, they were able to frustrate his efforts and depose him. This basic conflict between majority of Australians who want an independent and prosperous nation, and the privileged few who see our future as a loyal satellite of overseas masters and see themselves as born to rule, has provided the landscape upon which Australian politics has been played for the last 199 years.

Socialism is an economic system in which the "means of production" is contolled by the government on behalf of citizens, and in which income is distributed in ways compatible with economic stability and sustainability rather than randomly and chaotically as happens in capitalist systems. Socialist governments do not hand out money to parasites and speculators - that is the preserve of corrupt governments in the context of a dying capitalist system.

Oi Mate:

07 Jul 2014 5:09:24pm

'This is the usual anti-investment, anti-capitalist dribble served up regularly in the media to feed to the class war drones.'

Negative gearing is about as anti-capitalist as you can get... unless 'leaning', as Joe Eleventy calls it, is a capitalist ideal... of course, Sweaty Joe also believes in negative gearing and an expert at 'leaning'. He gets the benefits on multiple occasions... 'leaning' on the taxpayers that is.

Blzbob:

dmans5:

07 Jul 2014 9:11:33pm

Negative gearing was introduced to increase investment in rental properties to overcome the shortage of housing. It was not introduced to make people rich , it was introduced to give the tall poppy cutters something else to be jealous of.

5minutes2midnight:

Aussie Sutra:

08 Jul 2014 11:24:55am

Actually, you don't have to rent out a house to benefit from negative gearing. Only people who don't know how to work the system would think that. Negative gearing takes property OUT of the rental pool.

Ngear:

08 Jul 2014 6:59:04am

What they provide is a house that can be rented. Also allows people who want to down size or move from a location greater opportunity to do so. This in turns free up cash to either spend in the market or further invest. Not to mention more cash to state governments with stamp duty and other taxes.

Arthur:

07 Jul 2014 10:42:45pm

"If investors couldn't make money out of housing in this way, they wouldn't invest and housing growth would die overnight"

Janice, if investments were genuinely, positively geared, sound investors would still invest.Positive gearing can only occur on property, as the property market currently exists, when debt is very low in comparison to the value of the property.Positive gearing could also exist if property values weren't so obscenely overpriced as they are now.Property values are obscenely overpriced partly because of negative gearing and the CGT tax rules.Negative gearing works as an investment tool because the market is being pushed higher assisted by negative gearing.All very self perpetuating. Smells of bubble.

Yes housing (price) growth would die. One of our big economic problems is our economy is addicted to perpetual growth in house prices. Growing house prices beneficially affect the ability of small businesses to invest in themselves.

Maybe housing (buildings) growth would die, but I doubt it. People still have to live somewhere and genuine supply and demand (not skewed by the tax system) would drive the property market.

Overpriced housing is a big problem. You as a participant investor are part of the problem. Not "you" as in you personally but "you" as in your ability to use the tax system for personal gain. The banks, the real estate industry, governments - local, state and federal etc are all part of the problem.

Aussie Sutra:

allaboutlies:

07 Jul 2014 5:19:46pm

...and every dollar in tax that you avoided while building your wealth is a dollar that someone else had to pay.

You didn't dispense with your 1st, 2nd and 3rd investment property loans as soon as possible because you needed to maximise the tax advantages so that you could save for your 4th, 5th and 6th investment properties.

Catherine:

07 Jul 2014 6:18:10pm

JaniceWhat is the point of owning 11 properties? Are you hoping that working people will be forced to rent them and subsidise you to do nothing? That is the problem with negative gearing it encourages a society of rentiers, and parasites, that is not the society that I want to live in.

AE:

07 Jul 2014 7:37:27pm

The point is that she is trying to provide for her future - something that many on these blogs just cannot abide. And nobody forces tenants to rent anything, they can rent or reject any place.And if their all paid off, then there is no negative gearing.

Aussie Sutra:

08 Jul 2014 11:29:33am

She should try to provide for her future by engaging in productive work, not rent-seeking, which is non-productive. A proper regulatory structure would make it impossible for people to own multiple houses.

PW:

07 Jul 2014 8:04:30pm

"What is the point of owning 11 properties? Are you hoping that working people will be forced to rent them and subsidise you to do nothing? That is the problem with negative gearing it encourages a society of rentiers, and parasites, that is not the society that I want to live in."

You want to live in a society where you cannot rent a house? Where unless you've got a lazy $50k laying around you have to live with your parents, or sleep under a bridge? Janice has earned the right to watch the money roll in. You are just jealous because you are too dull to do the same.

Aussie Sutra:

08 Jul 2014 11:31:08am

Actually no, Janice has not "earned" anything. That's the point. There are only three nations in the world that have negative gearing on properties, and they all have people struggling because they cannot afford the high rents. The rest of the world seems to be able to provide more affordable housing with plenty of rental opportunities without negative gearing.

Aussie Sutra:

08 Jul 2014 11:28:18am

Absolutely correct. Janice thinks that her ability to profit from the tax system is a form of cleverness that should enable her to do nothing at all and be supported by society. It is parasitic thinking. Very unfortunate that our political structure has allowed these kinds of people to actually think that they're clever and/or helpful to society when they are obviously neither.

allaboutlies:

07 Jul 2014 6:43:42pm

I understand very well as I used own investment properties.

You avoid paying tax by claiming all the expenses on your investment as a tax deduction as I used to do. There is no real incentive to paying off the loan early because then you really do become a taxpayer!

Seriously, you should stop being so condescending to those you perceive to be lower than you.

Have a nice day........ but please remember that someone else is paying more tax because you got to pay less.

Ngear:

08 Jul 2014 7:04:10am

As an investor I can not wait for my investment property to be paid off, it means I get to keep the rent earned. I want diversification of my income stream because if I do loose my job or my salary is reduced do to a career change I still have some income and an investment for my children.

Ann:

08 Jul 2014 2:01:00pm

Good, then you are a fine investor. If you aren't rorting the system and won't care if your properties lose value - because the rental is your income stream, not the tax breaks or the capital gains - then there's really nothing wrong with what you're doing.

It's the investors that are relying on property to grow, grow, grow and never fall that are hurting the poor in this country.

Arthur:

07 Jul 2014 11:03:37pm

Janice you are a genuine property investor in my view. And you successfully used the tax system to help you build your investment portfolio - well done. You most likely started your investment campaign with the intention of generating a good revenue return on the risks you have taken, with a capital gain a nice reward should you choose to realise part or all of your investment.

As a former financier I can assure you that the majority of high tax bracket, wage earning, investors have no such medium or long term goal as yours and have no plan at all in actually turning negative gearing to positive. The short term goal is they get a good tax return and don't get crappy tenants. The only long term goal is the hope the property value will continue to rise. The medium term goal is that the property value rises quickly and they can use that equity to highly gear (which by default is always negative gear) another property and so on.

All the proposed future decision options are based on there being a Capital Gain. Actually making a good investment seems to be "by the way".

janice:

08 Jul 2014 8:50:05am

Ha, I've taken multiple haircuts on my direct investment in the share market and with my super over the years which is why I turned to diversifying investments myself since the super funds were not doing it very well.

So it turns out I weathered the GFC very well on average since my property investments did not tank, while my super and shares did.

So here's the upshot for all the hysterics who gloomily roam this site, the banks paid tax on what they earned on my loans, I had to pay tax on my earnings before I could pay off my loans, negative gearing does not cover all your loan repayments.

So I went without a lot of things, trips to Bali, new cars, jetskis .. lots of stuff and put it away so my retirement would be worry free.

I don't have to depend on all the grumps who want more and more government handouts that we know we can't afford

I love the way so many people on this site are against anyone doing well for themselves and they are oh so concerned about government tax income, but they all want handouts themselves and for their mates, they have no trouble with Labor wasting Billions of $ but don't like investors being successful.

Sometimes I wonder if most of the usual inhabitants on this site just want to be looked after by the system, they all missed out on communism and are angry about it.

Hank Moody:

08 Jul 2014 10:31:12am

Tax and the various reduction methods are behaviour modifiers. We have to ask; what is negative gearing doing?

It's clearly contributing to the crowding out of first home buyers. It isn't contributing much in the way of new housing stock. On all counts that's behaviour that isn't beneficial over the long term. The current system might have been a good idea in the past, it isn't at present.

Now, there is clearly an argument for negative gearing on new dwellings. Those investors are adding to supply and taking far more risk than those buying established dwellings.

That were an awful lot of straw men in your comment that I won't bother with but I will say; no one has a problem with people doing well when it is a benefit to society - a detriment on the other hand...

Curious party:

08 Jul 2014 11:26:18am

Janice:

I am so pleased that you were in a lucky position with enough resources and control over your finances to be able to weather the GFC. And by the way, I consider it the one of the classiest things that a person could do to gloat about one's own financial situation and at the same time to denigrate those who were not lucky enough to be in a similar position as they were in.

You fall into that same BS argument that so many of the older generations/property owners do. You look at people who cannot afford a house taking a holiday in Bali and think that it must be their own fault that they cannot save for a deposit. Except you fail to take into account that you can have a decent holiday in Bali for less than 2 grand, whereas to get a house deposit you need at least 50 grand. So tell me: where are these people who are taking 25 trips to Bali? And over what time period are they making these trips (because if someone has been saving for 20 years to build up a house deposit {the required size of which would be ever increasing} then it becomes impossible for them to work for enough years to actually pay off the mortgage).

"I love the way so many people on this site are against anyone doing well for themselves and they are oh so concerned about government tax income"

Except that is precisely the point. You didn't do it for yourself. You were able to do it because the government set up the rules so that they advantaged you more than those who are still toiling to save for their first house deposit. You were given tax advantages that they had no access to.

BTW, I have met quite a few people who claim to have made it all on their own but who in reality have been able to do so because they could take risks knowing they had a family that would support them if the risks didn't pay off. I wonder if you are one of those type of people...

AJP:

08 Jul 2014 8:18:36am

Janice no bank in Australia would have lent you the money without the current taxation regime. Basically you now hold 11 properties, and you and your family can only live in 1.

10 other families are now denied homes in which to live. You are the problem. You are the reason why house prices are unsustainable in this country and why your children cannot afford to buy homes. When the correction comes, get ready love, because you will bear the brunt.

Obita - check out the clauses in your loan agreements and registered mortgages. When house prices come down, the banks have a right to request additional security based on an "independent" valuation. People like you are going to get brutalized by the banks (if you do not have tens of thousands available to dump onto each mortgage) and prices (and naturally rent values) will be savaged by the inevitable repossession sales (at knock down prices) that follow. Good for the poor and young looking to escape the rental market. Bad for you.

chaddo:

08 Jul 2014 11:29:41am

Janice, Just curious about what you will do with the 11 properties you own when you need to sell them ?Or is the income sufficient to maintain you in ?old age? as you I?m guessing you will be a self funded retiree ?. What about the huge GCT you will have to pay?

Ann:

I, and millions like me, don't want to "get ahead". I just want to "get a house". I don't care you all have diamond-plated megayachts, I just want a darn house so I don't have to live in fear of being homeless if I lose my job!

Invest in shares, start-up companies, moon landings, whatever else you want if you want to become rich.

Hockeydonian:

v:

08 Jul 2014 4:02:25pm

janice,

"How do you reckon I'm going to be a loser?

Do you think rents are going to drop?"

Well, if negative gearing were abolished, idle speculation in residential real estate would cease to be such an attractive option and some may even be forced to invest in productive enterprise rather than real-estate speculation. With the speculators out of the market, house prices would fall to more natural and sustainable levels, greatly increasing the pool of Australians who could afford to buy their own home and subsequently greatly decreasing the demand for rental accommodation (which will further decrease the negative impact of speculation on housing). As you know, lower demand = lower prices (rents).

Australia has a real problem in attracting sufficient investment funds for productive enterprises. This makes us more reliant than we should be on foreign capital. If negative gearing were abolished the relative attractiveness of investing in productive enterprise would increase and the attractiveness of economically-damaging speculative investment would collapse - freeing up more funds for productive investment and taking a great deal of pressure off our current account. It makes no sense at all to maintain a policy that actively discourages Australians from investing in productive enterprises while simultaneously creating an entirely unnecessary housing crisis in a country that has more empty houses than homeless people.

Sorry janice, but sometimes we have to accept that a privilege we enjoy as a consequence of social malfunction is just a temporary bonus that cannot last. You've done well out of one of Howard's more disastrous miscalculations, and you should consider yourself lucky while accepting that the gravy-train couldn't go on for ever.

Remember what Keenedy said: "Ask not what your country can do for you"? Now's your chance to put your country, and your fellow Australians, ahead of your back pocket.

Maynard:

07 Jul 2014 3:33:25pm

Your definition of speculation as holding an asset solely for a capital gain is wrong & demonstrably so: Amazon lost money for many years & still makes little on its asset base, preferring to meet customer demand & build market share. It directly & indirectly employs tens of thousand and creates jobs & economic growth.Most businesses go broke, unless government guaranteed like banks.Hence your idea of removing the tax shield on debt for business not making a recurrent profit would probably put the economy quickly into recession. It could also weaken the finance industry. Simplistic approaches only work very occasionally & mostly fail ie a carbon tax/ETS

Ann:

08 Jul 2014 2:07:09pm

No-one wants to remove the tax shield on businesses and other productive/speculative endeavours.

It's simple that, surprise-surprise! The current property tax system in Australia is fairly unique in the world. It is not "the way it has to be" and property speculation should not be the same thing as venture/business speculation.

GraemeF:

07 Jul 2014 3:50:15pm

Reduced tax on asset gain and negative gearing fuel speculation not investment. Over 95% of properties (and shares) that take advantage of these provisions are existing ones.

What fool believes that encouraging the trade and inflation of the prices of second hand goods is productive? It is an inflation bubble that can only survive by intentional government intervention at the expense of more pressing and sensible use of money.

Get rid of negative gearing, the half tax rates and reduce our immigration by half or more and housing will become more affordable and the unemployment rate will drop. Normal people will benefit not just the banks, the real estate developers and other rentiers. The current system is a boon for parasites.

I will without doubt hear cries of anguish about how the move will affect people who 'have invested so they don't bludge off the taxpayer when they retire blah blah blah for the good of renters blah blah blah' but a stupid system is a stupid system. 'Real Estate' is not a true market, it is skewed heavily towards those who already have and against those who need a home to live in. When a run down two bedroom workers cottage with only street parking can get a price over $700,000 dollars then you know that insanity rules.

Peter of Melbourne:

07 Jul 2014 5:19:25pm

"What fool believes that encouraging the trade and inflation of the prices of second hand goods is productive?"

pity about the fatal flaw in your so called argument. you can replace a manufactured product with another manufactured product whether it be physical or implied (such as stocks and bonds). you CANNOT manufacture a new piece of realestate (unless your some kind of great and powerful wizard! please be a great and powerful wizard, my kids want a flying unicorn)

"When a run down two bedroom workers cottage with only street parking can get a price over $700,000 dollars then you know that insanity rules"

ummm no it just means there are either morons with more money than sense or else canny investors with the money to redevelop the land making it into something worthwhile.

the confected outrage in these forums is pathetic. you want to drive down the cost of housing in our cities? then we need to build completely new cities from the ground up in new regions. you can spit in the US without hitting a major city, the question is "do we want to go down that road?"

Ann:

GraemeF:

It is clear and simple that taxation policies and immigration policies are creating over-priced assets. It is intentional government policy that benefit an ever decreasing number of people.

You spout the usual right wing propaganda in most of your posts so why not support a change of legislation so the 'market' is fair? Why support a market where people who purchase a second dwelling get tax advantages over those who don't have their first? Why support the market being propped up by the fantasy of perpetual growth with artificially high levels of immigration?

We could stop importing and producing cars so that old clapped out bangers would become valuable as scarcity increased but is that smart? Would having money tied up in more and more run down vehicles be good for the economy? Would having smash repair barons in the BRW rich list instead of property developers be better for society?

The fatal flaw in your argument is that right wingers don't want a true 'market'. They want a market that suits the already rich and powerful leaching off an ever growing pool of people desperate for work and a roof over their heads. I don't want new cities, I want this one to be liveable as is my democratic right. Right wingers don't like democracy, they prefer the power of the dollar over the power of the people.

We all deserve somewhere to live. We don't deserve tax exemptions for purchase of second hand properties.

AE:

GraemeF:

08 Jul 2014 12:52:39pm

Overpriced is a 'worker's cottage' that can't be afforded by a basic worker. The price of real estate compared to the yearly wage has been an exponential explosion. What an average worker could afford in 1970 is now beyond their wildest dreams because of artificial manipulation of the market.

Aussie Sutra:

08 Jul 2014 2:48:17pm

People who are speculating think they never really have to "pay"...they just have to be a parasite on the taxpayer until they figure they can unload at a capital gain. They don't think f what they do as "paying", they just see it as "holding costs". Pure speculation and it is an evil we need to remove from our system.

burke:

07 Jul 2014 3:50:46pm

Negative gearing may not have much going for it, but no negative gearing has even less - as Paul Keating discovered. Abandoning a system for a worse one seems not terribly smart. Deductible interest is a standard feature of the tax system. If it is deductible for a business loan, or car purchase, then why not for a house purchase? Your arguments are not persuasive at all.

pilotyoda:

Simple solution. Wind back negatice gearing for existing house stock (not retrospectively) and only allow it for new constructions.

This will slow the exhorbitant property price rises and boost housing stock instead of jacking up prices of old houses.

Tax deductions for improvements (including energy efficiency) should be allowed, unlike the current system of only replacing like with like, would also benefit renters. Currently houses become run down to the point where older properties sold by investors are usually bulldozed because the property has become almost unliveable

Tennants will benefit as rental pressures will ease and a new, energy efficient home will be much nicer to rent than old, run down homes.

First home buyers will benefit because they won't be competing against cashed up investors that only do what they do to get benefits from the taxpayer.

Aussie Sutra:

Toc:

08 Jul 2014 7:39:57am

You can't remove tax losses for costs and interest is a cost.You can insure that capital gains are taxed at the same rate as other taxes.While you're at it, you could raise company tax.Unfortunately, the ATO is pushing company structures on people who would otherwise have been sole traders.

John S:

Over the longer term, "negative gearing" is only a weak factor in the cost of housing. This is clear in the light that there are positively geared investors choosing to participate in the market.

In a growing population, the primary driver always comes back to the incremental cost of new housing. When demand exceeds the existing supply of houses, the value of those houses in that location will always rise to the point where it is economic to build a new dwelling of the same utility.

So winding back "negative gearing" loss deductions would really only be helpful if the additional tax revenue raised were put into infrastructure, such as rail, to ease the transition to handle population growth.

rusty cairns:

07 Jul 2014 5:25:16pm

GDay burke As reported in the article above the Howard government changed the way capital gains tax is calculated which has given an even Greater advantage to those whom have assets which enable them to gain finance where those without these assets don't receive any advantaged if fact they are disadvantaged.Read the article again, it argues that the other types of investments you mention also need changes of negative gearing and or capital gains tax to make it fairer.

dean:

maddog:

07 Jul 2014 7:39:30pm

Good, so those who are not employers are not allowed to comment on employment. If you don't own a business don?t comment on banking. If you are not a politician don?t comment on policy. Only those with money are allowed to comment in this forum. blah blah blah. Are you are born to rule?

We are all allowed to comment if there is an incorrect comment or argument simply correct it. Don?t attack the messenger, attack the message.

Chris L:

George Spiggot:

07 Jul 2014 9:00:57pm

Actually, I was a small business owner for eleven years and sold when I received an offer to good to refuse.One should never assume, makes you sound like an arrogant donkey when your proven wrong.I am well aware of the rorting of the tax system through dodgy accounting, its common knowledge.

Thats a big no to the investment property. I paid off my mortgage without any government handouts and am happy and grateful for what I have.

I detest the fact that my taxes are being sucked up by parasites when they could be better spent on education, health or infrastructure and I'm not the only one who feels this way. I think we as a society, need to re access our priorities and help out young families before handing over public money to the better off.

Ann:

I know plenty of people who own small businesses, and most of them are the biggest crooks I know.

I also know plenty of small business owners (and work for some) that I consider to be impeccably honest.

Don't pretend every small business owner is some kind of saint struggling hard to provide for their families and improve society. A good half of you are crooks screwing over the system and everyone else for their own benefit.

Pensioner:

07 Jul 2014 5:33:15pm

Negative gearing doesn't have to have anything to do with running a business.

Anyone can take advantage of negative gearing if they're well into the top tax bracket. They buy the property as an investment with their eye on longer-term capital gains, and use the losses to reduce their taxable income. A business that rents property out wants positive gearing so they make money from their investment right away.

By contrast, the average person can't deduct the interest on buying a car or a family home from their taxable income.

So it comes back to -- negative gearing is a nice arrangement for the well-off to invest in property and reduce their taxable income. Another great deal that helps the well-off become even better-off.

Blzbob:

LeftRightOut:

07 Jul 2014 5:48:38pm

It's the premise that all expenditure should be deductible that is the problem.

Businesses often waste money and claim a deduction, essentially getting the government/tax payers to subsidise poor or sloppy business. The introduction of FBT reduced us paying for corporate lunches, but some scams still exist.

The tax system needs a complete overhaul to change this premise. Something I suspect we'll never see.

a taxpayer:

Mark James:

08 Jul 2014 9:29:30am

cutyourchin, my understanding of what happened to rent increases at the time negative gearing was quarantined was that rents went up in Sydney and Perth, but in every other state rents rose in line with inflation.

I also don't think the quarantine was in place long enough for us to be able to reach any reliable conclusions as to its effect.

Ann:

08 Jul 2014 2:15:12pm

"cute"youngchic, check out an actual graph of rent price rises and falls over the longer period of the 70s to the 90s and you will see that the rent rise during those periods of no negative gearing was utterly normal - in fact, lower than previous rises, and it kept rising after negative gearing was put back in!

Peter the Lawyer:

Of course the government cannot stop negative gearing directly. It can only do so by preventing the general income tax deduction from apply to interest paid on negativly geared loans.

Of course, that's really an interesting issue. You see, it is not a case of dropping a special provsion in the legislation that gives negative gearers a tax deduction. The government would have to write some very complex legisltion to achieve the aim Micahel Janda proposes. So you can imagine the confusion and the litigation that would result. Already I rub my hands together with glee at the prospect.

There is a lot of talk in this article about how many people have investment properties, yet there is nothing that shows that all these investment properties are negatively geared.

In a proper tax regime capital gains are not taxed at all. So the Michael Jandas of this world ought to be glad that even half of the capital gain from the sale of assets (only by individuals and tursts btw, not companies) is deemed to be income. Comparing capital gains and income is a false dichotomy, as in all jurisdictions the two are regarded as completely different things.

lala:

07 Jul 2014 5:48:58pm

There are already similar provisions in the ITAA in relation to Personal Services Income. The Thin Capitalisation provisions also act to limit a tax deduction for debt. It really wouldn't be that difficult.

As a lawyer, you would know that very few tax disputes proceed to the litigation stage, particularly when it comes to individuals. And if the legislation is clearly written, even less so.

I am fairly sure that the ATO would have pretty good statistics in relation to taxpayers whose tax returns show a loss from investment. In fact, this is currently required to be disclosed in tax returns for certain taxpayers.

What is a proper tax regime? It is one that doesn't cause distortions in investment decisions by favoring one form over another, ie income over capital gains. So I think that you would find a 'proper' tax regime is likely to include capital gains.

Ann:

Aussie Sutra:

08 Jul 2014 3:02:56pm

A proper tax system ensures that the basics of society are equitable and in reach. Thus, when speculation is distorting something like housing, destroying the lives of many who are the least able to afford speculation-driven increases in prices and rents, then a "proper" tax system would penalise activities that create that distortion. Thus, you would see massive capital gains on house flipping for instance, bu no capital gains on the family home that has been used for years.

Toc:

Peter the Lawyer:

08 Jul 2014 10:04:45am

New Zealand doesn't tax capital gains. Australia didn't tax capital gains until 1985. The whole idea of income tax is that it is a tax on income, not on capital. Over the years before 1985, many cases were fought on the distinction between income and capital.

In other jusrisdictions capital gains are taxed, but in a different manner, not uncomfortably deemed to be income, like they are here

Aussie Sutra:

AJP:

08 Jul 2014 8:44:03am

It would be a very simple inclusion within the first limb of s 8 ITAA 97. Some say that it is already covered. That is to say, what do the deductions you claim on your investment properties have to do with you earning income as a lawyer? I see plenty of problems with the nexus there.... don't you?

Peter the Lawyer:

08 Jul 2014 9:49:12am

As someone who gets paid large sums to advise on tax, I can assure you that tweaking section 8-1 of the ITAA 97 (not section 8 ) of the Act will not provide an easy method of preventing deductions being claimed on negatively geared properties. Having seen the Parliamentary draftsman's work over many years, I am certain that any removal of the ng deduction would involve many pages of amendments.

It has long been a principle of tax law that deductions do not have to match income. Thus if an entity has two divisions, one profitable and one not. There has always been the understanding that the company can claim deductions ofr the losses of one division against the income from the other.

To stop the ng deductions you would need to act against this principle. You are therefore making the Act les simple and and less cohesive.

If you must try and argue with adults, don't try to be offensive, it only makes you look small and insignificant.

Cabinetlunchtime:

NotMyName:

07 Jul 2014 3:57:56pm

I have for over a decade in this ABC forum complained about the criminal neglect of all political parties for allowing the five billion a year of taxpayer funded speculation of negative gearing to push the cost of renting or buying a home to the present unaffordable highs to continue; the counter claims of the negative gearing supporters has noticeably dribbled away, probably due to the realisation that negative gearing has had the biggest negative affect on all Australians. I have written to both the Gillard and Abbott governments asking them to consider removing negative gearing, both were obviously too busy to reply but passed my request to the treasury department, both replies relied on the immoral position that speculation in the housing markets shouldn't be disadvantaged, and should have the same taxpayer support as those speculating in the stock markets, why? Why should taxpayers fund speculation of any form, in the end the majority of the population ends up supporting the lifestyles of a few, and most of those few object to paying taxes that support the heath of those who rely on Medicare.

sidlaw:

07 Jul 2014 5:36:10pm

NotMyName,There is a significant difference between the stockmarket and property.

If I invest in stocks and the market crashes then I carry the loss. When the market recovers I pay tax on all capital gains after offsetting my previous losses. If you want to tax the gains then you must allow the losses to be taken into account otherwise people won't risk their money investing in the stockmarket.

It's the other way round in property because market forces dictate that investment property is rarely positively geared at the outset. Maybe if investors had to carry their losses until the property was positively geared it would be a different market.

When I arrived in Australia I couldn't believe how generous negative gearing was. What a lark!

Bill:

07 Jul 2014 5:37:16pm

Negative gearing is not the main reason for the house and rent prices that we have today, it may be the reason that banks are rich and government is poor but has little to do with real estate valuation. The reason we have high real estate prices is 99% because land prices are inflated by 200,000 skilled workers we accommodate every year with very little new land released for building. Growth in real estate is effectively government guaranteed by their immigration policy and this is unique for any asset class so if you haven't figured it out yet just buy as many places as your bank will allow and never rent.

almostretired:

07 Jul 2014 3:59:02pm

Its staggering that over the past decades Billions have been invested in housing and yet we have an overall housing shortage. How much wealthier Australia would be if only a modest proportion of this money had been invested in Infastructure and new industries creating the jobs we will need in the future. The Abbott government teased the electorate during the budget with a proposed medical research fund which over time would be funded by the proposed $7.00 medical co-payment. But that would take decades. Why not have investors channel money now into this proposed now so that we build the future now. It appears however that would be to hard and instead we are going to continue to pimp up the price of property.

Big problem of course with so much existing household debt linked to housing how do we turn the ship away from speculation towards true productivity? Another file routed to the "to hard" basket.

Peter NQ:

Dave:

07 Jul 2014 4:04:29pm

"Excluding refinancing, housing investors now make up roughly half the new home loans being issued by Australia's banks."

This was surely never the intention of negative gearing. The distortion to the housing market by that half of the customers is insane. Come on Mr Hockey, what were you saying about the age of entitlement? What's the Liberal Party's general philosophy about distortion of the free market by policy which overreaches its original intention?

Aussie Sutra:

John51:

07 Jul 2014 4:05:11pm

Michael, thanks for a very good analysis of what is wrong with Negative Gearing. By its very name it tells you how bad a tax this tax is. It is not only bad it is an incredibly inequitable tax and in so many ways.

This tax is not only inequitable, it is ever so slowly killing off the first home buyers dream of owning their own home. It has now reached the point where those investors in homes are greater than those buying their first home. That tells you something is seriously wrong.

But the other fact is that bad policy leads to several other bad policies. That is not only one of the problems of bad policies. You could argue that is a definition of a bad policy. And it is one that leads to the implementation of other bad policies.

Beside the fact that you could tie the increase in negative gearing investment to the decrease in first home buyers. I would suggest that you can link it to two other policies. One is the drop in government investment in social housing including state housing. The other is the increasing cost to the budget of rental assistance, which in itself has not kept up with the increases in the cost of rent.

lindsay Cooper:

07 Jul 2014 4:05:40pm

Just more of the same, whats the point of commenting on it, the rich get richer and the poorer get screwed. Abbots first budget is a classic example, they are not even pretending to help the general masses.The CBA have been stealing peoples savings for many years, why the big fuss now, they won't be penalised in any meaningful way.Has anyone been following ASIC's investigations into NSW gov. Corruption is in epidemic proportions and nothing will happen. Been like that for many years.

John51:

07 Jul 2014 4:05:51pm

Continue:

The argument that private investment in rental accommodation is a furphy pushed by those who don't want to see the tax dodge of negative gearing removed. The more money invested in property the more it has pushed up the cost of property and the more it has pushed up the cost of rents.

Increases in rental property investment have not pushed down the cost of rents. It has done the opposite and will continue to do the opposite until negative is put to the sword. If government instead shifted the budget money subsidising negative gearing and put it in to social housing than we would see a stabilizing of rents and eventually a downward push.

But the trouble is neither the coalition, or labor, have been willing to go down this path. Part of that is because of the heat they would get from the developers and property industry. Part of it is from the so called mom and dad property investors. But you also have to ask how much skin they have in the property investment game directly or through Family Trusts.

This, of course, leads to the other big inequitable tax break hit on the budget of Family Trusts. Another of these tax breaks that favour the top income bracket. And another tax break that I would suggest is being abused. And I will suggest one that neither political party will do anything about. You also have to ask how much skin our politicians have in this tax lurk that enables them and their families to reduce their payable tax.

Now I would love some journalists to be out asking our politicians these questions. But I won't hold my breath waiting as I bet there are a few journalists out there also using both these tax breaks to reduce their own taxes. So I have to ask how do you change things when the people who have the power and voice are making advantage of them.

jimbob:

07 Jul 2014 5:58:53pm

OK John51

I have a hundred bucks. It can sit in the bank and earn close to 0%; I can buy a few dividend paying shares and get around 4% (with a few tax breaks) or I can buy property and get around 4% (with a few tax breaks)

Property is just another investment class. To stop me investing in it, the other options have to be far more attractive. Supply and demand for investments....

As for the government providing for housing needs, it would still cost the same land costs and the same construction costs (probably more) but how will we pay for it?

The Egyptians had a novel solution - everyone worked for the Pharoah and were grateful for their slice of bread and cup of water.........build anything at very low cost....

John51:

07 Jul 2014 7:38:07pm

Jimbob, you miss my point. Why can you barely get much more than 0% from a bank yet as you say get better returns from dividends and property. It comes down to tax policy and which area of investment tax policy favours over others.

As we have seen from the GFC, tax policy can have a whole range of consequences right across the economy. A roof over your head for yourself and your family is a basic need of life. Yet tax policy that favours those at the top with plenty of wealth to spare means that more and more people find it harder and harder to buy that home let alone pay for rent.

When property prices are increasing at a far quicker rate than the inflation rate or incomes for most people than we have a serious problem. And when those ever increasing property prices are being directly driven by tax policy that favour investors over home owners and especially first home buyers that we have a serious structural tax problem as well as a serious social problem. And this will only get worse unless something is changed.

Aussie Sutra:

08 Jul 2014 3:29:14pm

Property should never be classified as an "investment class". Just as food, health and other essentials like the fire brigade and police force should NEVER be classified as "investment classes". It is simple to remedy. Penalise those who use property as an investment and they will STOP. Their money will probably be more productively used when it is not tied up in real estate.

burke:

whohasthefish:

07 Jul 2014 4:06:27pm

Good luck in getting this particularly vested interest infected government to do anything at all in protecting us from the excesses of their big end of town backers. In fact they are working in the exact opposite direction with their 'Australia is open for business' mantra that deceptively hides their 'Australia is up for sale' policies.

They are the most morally and politically corrupt bunch of politicians we have ever seen in this country and we will be paying for their dishonesty for many years to come.

Unabated and unchecked self regulation by the financial sector is and has been the problem for many a year. (Did we learn nought from the GFC?) Governments need to regulate, after all, is that not what they are for.

Anarchy in our financial sector reigns as can be seen by the recent revelations about the criminal actions of the CBA and others, yet this government winds back the ALP/Greens reforms designed to protect the consumer. Unbelievable.

If self regulation worked, then, we would have no need for police, as people would confess their crimes and lock themselves up, would they not?.

The LNP love to say Governments should get out of the way of business when in fact that is akin to removing the referee from the footy field.

The question is, can Australia afford another two years of these fools?.

Clancy:

JimMac:

07 Jul 2014 4:07:54pm

Only problem Michael, as Paul Keating found out, you take away negative gearing and the rental market crashes. Rental properties become as scarce as hen's teeth thus rental costs go through the roof and poor people end up on the streets in droves. Sad, but that is the way it is.

Negative gearing is, in fact, the most effective form of rent subsidy we have in this country and without pouring billions into public housing there is really no other way to achieve the same result.

pilotyoda:

07 Jul 2014 5:34:31pm

If the impact on prices will be as bad as you say then these investors will back out of the market. That will place downward pressure on prices and more people would be able to afford a first home, reducing rental pressures.As for an affordable subsidy, just use some of the $5billion saved to increase rental subsidies and we will have a win-win situation.

sgra10:

07 Jul 2014 6:48:43pm

Wow, that is absolute rubbish. Removing negative gearing would simply even the playing field between investors and owner-occupiers that has been skewed so dramatically over the last few decades. Housing should primarily about housing rather than an investment. The rental market did not crash when negative gearing was briefly removed. Rather, it was the outcry from vested interest groups that forced its reinstatement. Why do we continue subsidising loss-making "investments" to the tune of 4 billion dollars per year? Watch owner-occupiers flood back into the market and equity could go into businesses and industries that create jobs and prosperity rather than a non-productive equity bubble. If you tried explaining negative gearing to a foreigner, they would think it's a joke.

MDG:

07 Jul 2014 10:07:32pm

Negative gearing is appallingly inefficient as a means of ensuring supply for the rental market. Something like nine dollars in every ten spent on it goes towards supporting investment in existing housing stock, not towards new construction that increases supply. I'll stand corrected on the numbers, but I believe that's the gist of it.

I'm not opposed to the idea of subsidies to ensure that rental property remain accessible, but negative gearing as current practised is horrendous. If that's your objective, you should advocate a better and more targeted tax incentive instead.

Sub Pontem:

08 Jul 2014 7:13:35am

All Paul Keating found out was that Real Estate lobby groups are vocal and effective. Rents didn't actually change as a result of removing negative gearing. Read Saul Estlake's extensive writings on the subject for a little background instead of spouting the same tedious, ignorant untruths that get trotted out every time this topic is brought up. Seriously, why bother to contribute to a debate when you cannot even get the central premise to your argument even close to the facts?

Ann:

No, the rental market did not "crash". It rose in two cities by a small amount, well in line with historical rises and falls.

It continued rising after negative gearing was reinstated.

In addition, only a handful of countries around the world have negative gearing on property, yet there are healthy rental markets in the US and UK where they don't have it.

Is Australia somehow magically different that every rental property would disintegrate into ashes if negative gearing was removed? Huh? Would we all jump into the sea rather than pay extra rental money? Huh?

AE:

tc21:

07 Jul 2014 4:12:14pm

Negative gearing is a disgrace, it is creating a nation of young renters. Young Australians are moving overseas to start a career and a family because it is impossible to get on in this country. Half a million dollars for a poxy studio in the Sydney area, give me a break. The system needs an overhaul. If it's bad now, what will it be like in 20 years, nobody will own, everybody will rent. Those negative gearers will be left with a property they can't sell.

Tim P:

AE:

07 Jul 2014 4:13:47pm

The criticism of negative gearing for driving up house prices ignores the fact that housing was much more affordable in the 80s, when negative geraing already existed.Blame state guvvaments for not releasing enough land, and for imposing that many conditions on building that you have to spend a fortune complying.But I'm sure that the luvvies will damn me for pointing that out though........

AJP:

08 Jul 2014 9:40:43am

AE

You're right. State & Local Governments are part of the problem too. If we are serious about addressing the issues associated with tackling the lack of affordable housing in this country, nothing should be off the table. The amount State & Local Governments take (in the form of land taxes, stamp duty, development application costs, etc) from each new development is of serious concern.

gbe:

07 Jul 2014 4:14:30pm

I understand the principal behind negative gearing but many residential rental properties the only capital gain is in block value as the house continues to deteriorate along with tenant standards until the house is not fit to rent and is sold at block value and returned to vacant land.

How do yet get a profit like that and it happens more often than not around here perhaps there is no incentive to maintain a negatively geared property.

Tator:

07 Jul 2014 4:15:28pm

Michael,most of those 33% were in place prior to Howards changes in CGT as 20 odd percent were in place prior to Howard winning in 1996 so it appears that that effect was not as dramatic as first indicated. It is more likely that baby boomers were coming to an age where they could afford an investment property and with 1987's crash fresh in the memory, wary of the stock market and approached the property market with gusto and the attitude that bricks and mortar were safer than share certificates.As a negative gearer myself, I didn't go out to buy a property to negative gear to start with, but turned my small unit into a rental once my girlfriend bought a larger house as we were outgrowing the unit. A big reason for people not to build new properties for negative gearing purposes is firstly lag time from the build as you have to settle on the land first and that is not paying rent and you cannot claim the interest paid between land settlement and house completion due to the house not being available to rent and not too many people can afford to drop the 5 grand or so in interest without a rent cheque to off set it. Plus with exorbinant land prices being the predominant driver of housing prices due to land banking by state governments, new housing prices have approached those of established houses and many established houses can be up and running in a week or so compared to 6 to 9 months for a new build.You state that the tax system is biased towards debt, but cannot formulate one that isn't biased towards debt in your article but continue to attack negative gearers who are only using the tax system as it is written. It would be interesting to see the effect such a different taxation system could have on business as well due to business using debt to leverage investment capital to enable establishment and expansions in business capacity

Hobart:

07 Jul 2014 4:18:41pm

Winners ? Banks and Realtors. Losers ? Every other Australian.

This isn?t Rocket Science. Obviously time to ask Treasury to review negative gearing and recommend sensible reform via an orderly process which allows this type of borrowing to be eased out of the market so that property values don?t fall off a cliff (which may happen anyway, no matter how carefully we make changes).

Sadly, Australian property is now so over-valued that a large painful fall in values is starting to look inevitable.

Or we can just let the banksters continue to make out like bandits. Over to your Mr Hockey. Show us you have policy substance and do something sensible before the inevitable property collapse.

whohasthefish:

08 Jul 2014 2:22:35am

By paying inflated house prices so they can get a bit back through negative gearing if they take on more debt and become a property investor. I think they would be better off with the lower price in the first instance, don't you?

Its a gamed roundabout mate. Any gains from negative gearing by the small investor are taken up in higher taxes paid to subsidise the negative gearing of the big investor. The small man will never win.

AE:

Ann:

08 Jul 2014 2:38:10pm

AE, making a gain on paper means nothing if they aren't averaging that "value" around on other investments. And the majority of homeowners are not so that "gain" is just the Emperor's New Clothes - some day someone is going to come along and tell them it was invisible all along.

And don't pretend you don't understand how the current situation with older generations squatting ownership of all the housing stock is pricing out the younger generations.

I suppose if the simpletons really need it, I can hand-hold and explain why that is what's happening and how it's happening.

burke:

Viking:

07 Jul 2014 4:21:45pm

I understand the general arguement against negative gearing, but I am lucky enough to be a long term renter to what some would call a 'slum landlord'.He has a very high income, uses multiple negative gearings to reduce said income, and I get an old but functional house in a good area for a reduced rent. We've pretty much left each other alone for the last 6 years.

Aussie Sutra:

Ann:

08 Jul 2014 2:40:47pm

Yeah and I bet he's really keen on repairing his slums. What happens when the roof starts leaking. Oh, guess you gotta repair it yourself out of your own pocket.

What makes your cheap-and-nasty "slum landlord" different from state housing? Is it just the puffed-up pride of not being on public handouts? (Oops, we lose billions of tax dollars a year to negative gearing, so I guess you are on public handouts, in a roundabout way!)

ronij:

07 Jul 2014 4:23:40pm

Not all of us property investors are nasty horrible people, most of us just want to provide for our future. I bought my first investment property as a single mum, on an average wage. I had the same pensioner tenant for several years, without putting her rent up. You say that it is 'wrong' for me to be negatively geared, and that I shouldn't have a deduction for my interest and other expenses, and will change the tax laws to prevent this. So, as I'm now positively geared, and paying notional tax, the same logic should apply, and I wont have to pay tax on my rental income??? Yeah, right. I also used all of this equity to guarantee my children's homes, so that they can get a foot in the property door. And now open the flood gates for abuse, from all of you that have a nice shiny car, and regular overseas holidays, none of which I have. My choice, that I live with. Live with yours.

ronij:

08 Jul 2014 11:10:16am

George, you don't pay for it, I'm positively geared. To others, I've rented to single mums, and haven't put their rent up. And to others, I am putting off selling because of the CGT, so if that was less, one of my houses might be on the market..........

dispen13:

08 Jul 2014 2:57:23pm

Hi George, "I just don't want 'My Taxes' to help pay for it". Perhaps a nice thought, but I'm sure that among the wealthy folk out there, some may begrudge the fact that 'their taxes' will be used for a purpose which carries significantly greater benefits the common man and his family, than for themselves. However, the moment we pay taxes we forfeit all right to the money and how it is spent, it is Government income . In theory, taxes are levied for the benefit of all and in this fair-as-possible democracy of ours, where greatest need attracts greatest benefit, by and large, the system works.Naysayers will never be totally absent and they have the right of free speech common to all, though we do well not to ponder the source of what fuels their arguments.

Indepenedent:

RogerA:

07 Jul 2014 4:27:15pm

Thank you Michael Janda for again drawing attention to the excesses of negative gearing in a time of surging house prices. What can be done, from a politically pragmatic perspective? Many will say, "Nothing much", for bleedingly obvious reasons. The Abbott government certainly will do nothing in its first term, and quite likely also nothing in its second term. However, State governments could have an opportunity to "tweak" their existing stamp duties on real estate sales. Tweak stamp duty into a defacto CGT, by making it payable by the seller, making it progressive (i.e. higher rates for higher value transactions, discounts for sellers who are pensioners, etc), and linking it to price history (the capital gains made).

Naturally, the necessary spin doctoring would never mention CGT, it would project as "stamp duty reform". Not a new tax, just a progressive reform of an existing tax. Talk up the benefits, promising to devote most of the proceeds towards improving the supply of social housing and affordable housing and essential infrastructure in public transport, etc. And at every step blame Canberra for its failure to properly fund the States, to increase the GST, to rein in surging house prices, their cruelty towards first home buyer, etc, etc.

Graham27:

07 Jul 2014 4:30:35pm

Negative gearing needs to be limited if not stopped. However to abolish it in one hit means creating a crash in property prices. No one would like that, home owners or banks. I would propose a cap on negative gearing at the current median claim level (ATO knows the number) and then wind it back to the maximum tax deductible level that is currently enjoyed by making contributions to superannuation. This might take 5-7 years of reducing negative gearing claims but it needs to be done. Slowly but surely than Australian property might become affordable again for the younger generation. Once in line with superannuation then it might be time for another review.

Aussie Sutra:

08 Jul 2014 3:41:40pm

I personally think a good crash would clear the air. We would need to ban foreign purchasing of Australian property at the same time though. We already have one in four homes being bought by Chinese of the elite criminal class.

Aussie Sutra:

Steven:

07 Jul 2014 4:34:30pm

The winners are also the lower end of the market in terms of rent. I both own property and rent because I work away from home.

The ability to negative gear gives some encouragement to provide rent to the lower end of the market which always is hard work. If I didnt have negative gearing, it would be easier to simply bulldoze the houses and just pay rates on unimproved land.

I believe nagative gearing was dropped once and this resulted in a large amount of rental stock leaving the market. The other issue is that if you do this to rea;l estate, you must apply this to all business and if so, this would disvcourage people from investing in businesses start-ups that dont create profit for a number of years, quickly close businesses during any down turn and to not invest in new equipment and technologies.

Stirrer:

07 Jul 2014 4:37:46pm

The fact is we not only have a tax system which favors debt -we have a Government which does.

Househhold debt trebled under the Howard Govenrment. The current Government's refusal to even acknowledge that problem is a measure of its deceit.It is the most dishonest-deceitful- incompetent Government in our history.

whohasthefish:

Maybe you remember the most profligate government in our history. Honest Johnny's policies on Capital Gains and purchasing votes with middle to upper class welfare started the revenue shortfall.

The same Honest Johnny who lied on Children overboard and oversaw the Australian Wheatboard Scandal. (providing funds to the enemy-treason)

Seems moral and ethical corruption is a strongpoint for the LNP, honed to a very sharp point by the present lot.

Face facts paulinadelaide, This particular LNP Government has surpassed the Howard government as the most deceitful-dishonest in recent memory as they have lied and lied and continue to lie about their lies.

The most dishonest-deceitful description fits perfectly with the actual facts.

AE:

Stirrer:

07 Jul 2014 7:36:57pm

He did not need to- all he did was allow the banks to flood the country with cheap money to create the credit/asset price bubble- just like the rest of the world did; cheap money funded unsutainable speculation- gave us the GFC and made debt slaves of most of us.

One of the biggest frauds in history, you did not see it coming and you are still blind to it.

Ann:

Caffettierra Moka:

07 Jul 2014 9:07:29pm

Did he or Peter Costello ever talk up savings? Or paying off debt? Some other nations might be fixated on telling you to do stuff like save 40% of your income or pass laws to make you look after your parents in your home. NOT telling you that, is the same as telling you to blow the lot. I do recall Peter telling us all to have another baby too.

Ann:

rusty cairns:

07 Jul 2014 4:42:03pm

If there is a budget emergency, surely investigating ways that those that can afford to pay more pay more is needed, rather than trying to cut finance to those that are struggling to afford basic living expenses.

Steve:

07 Jul 2014 4:45:22pm

Complete agreement with the author. Negative gearing means that the majority of taxpayers are subsidising those that willingly incur losses in hope of a gain that will only be taxed at half their marginal tax rate. House prices are pushed higher by those with taxpayer subsidised interest.

But take it further. Why don't we simply tax gross income at much lower rates than the current ones for net income? The costs of earning income should be borne by the income earner and their customer, not subsidised by the taxpayer. If the local traidie wants the $60,000 ute instead of the $20,000 one, then why do other taxpayers have subsidise the difference, or any of it. Deductions are at the heart of most tax rorts, so get rid of them. The Government can still take its $400 billion annually, but do it at 10% of gross rather than the currently much higher corporate and personal rates.

The current system favors:- borrowers over savers (you pay full marginal rate on your 4% term deposit but receive a taxpayer subsidy on negatively geared shares)- immediately deductible consumption over depreciable investment- gamblers over earners (favors millionaire winners over checkout checks because the current system can't allow for gambling losses).

And how many business people claim deductions for what really are private expenses such as phones, cars, home offices etc. Apportionment and 'reasonableness' tests are rorted. Get rid of them.

Aussie Sutra:

Jenny:

07 Jul 2014 4:46:15pm

It seems governments are more likely to serve primarily the benefits of the few wealthy people and interests in the short run. Concerning the national interests 20 years from now is less helpful than satisfying people in the next 2 years in term of election.

greybeard:

07 Jul 2014 4:49:37pm

Fully agree with your analysis Michael - the use of negative gearing in its current format is not intelligent tax policy.Negative gearing should be phased out with the following exceptions:1. new construction of dwellings - allow claim for say 5 year but only on the value of structure, not the land;2. new share issuance (IPO)

As a taxpayer, I have had enough of this kind of middle-class/wealthy welfare.All negative gearing seems to do is encourage debt and allow "investors" to outbid genuine home buyers at sales and auctions.

Enough. Houses should be predominately shelter for families, not an element of the tax system that treats it as a shelter from taxes for the wealthy.

burke:

Zany:

07 Jul 2014 4:51:00pm

Housing used to be just that homes for families not a money making venture supported by taxation for the privileged. Investment welfare is now out of control and has spawned a whole new industry of property pimps spewing there spiel to clients 50 percent of whom will actually loose money. Investment welfare (negative gearing) must now be stopped by this liberal government which maintains that the days of needless welfare are over.

AE:

07 Jul 2014 4:51:41pm

And why are rising house prices bad? They're very welcome if you own one or several. That capital gains tax concessions applies to any asset, not just real estate, and therefore leads to higher share prices. Yet higher share prices are universally considered a good thing. So why is rising house prices so bad?And if there is a big crash and people who paid top dollar for a house at the worst time get hurt, well so what? That's life, you know the risks when you bought, and if you didn't then you should have.

Bint:

ibast:

I'm glad someone is awake. If you are a home "owner" with a debt, then housing inflation is actually a good thing. It means you own a greater proportion of your house and that equates to security.

And the capital gains tax: Introduced by Howard it effectively negates any benefit from negative gearing. This is why rents went up after the introduction of the CGT. Less people were inclined to invest in property.

A lot of people miss-understand Negative gearing too. You don't get your house paid off by the government. All you get is the interest portion covered. And that is only an income reduction. So you only get 40% (at the most) of the interest portion of your loan.

All it is, is a deductible expense (more legitimate than the dry cleaning expense people put in every year). If it gets removed from the tax system, the system will become patently unfair, unless they also remove the CGT. So there is no benefit to tax revenue.

Not only that, nothing will be gained in terms of house prices. Rent will go up, as investors leave the market, and as renters shift to buying, they will cancel out any potential price drop.

The negative gearing debate is a stupid "Haves vs Havenots" debate. Logic and reason seem scarce on the ground.

CJB22:

07 Jul 2014 9:48:16pm

I see your point but the scary thing about a major fall in real estate prices is the impact on our banking system. I hate the greedy banks as much as the next person but if they are left holding houses that investors have defaulted on and those house prices crash then the bank itself becomes extremely vulnerable. The only solution is to wind back negative gearing on existing house over a long enough period, eg. 10 years.

Zany:

08 Jul 2014 6:52:17am

You obviously think that budging on the taxpayer is ok for yourself but not others. Negative gearing inflates the house prices by at least 150 dollars for doing nothing . This system forces families new to the market into a life of poverty and paying rent and this system of property pimping must stop now.

AE:

Chaddo:

08 Jul 2014 10:13:56am

AE ?We all have the same opportunity in life to study and better ourselves.?What a stupid comment . NO we do not all have the same opportunities. Not all live in areas where education can be easily accessed. Not all have the ability . Not all have the drive & aptitude. Not all have the support of family when we are young to see study as positive. Not all are comfortable with the debts tertiary study racks up. Not all have the health that lets them study. Not all can afford to study, many have to support family..I could go on but it becomes boring. I?m glad for you that you were able to study. But at least acknowledge that NOT all DO have the same opportunities!

AE:

08 Jul 2014 2:44:59pm

Nobody is forced to have kids, stay living where there isn't education (and distance education is huge these days), "drive" is a personal quality, and if you don't have it then it's your fault. I could go on but, it'd be boring.

ibast:

08 Jul 2014 12:09:26pm

Zany, removing negative gearing will only makes things worse for those struggling to buy their first house. For the reasons stated above, there will be no reduction in house prices, but rents will go up.

So those less fortunate will not only not be able to afford a house, but will not be able to afford to rent.

If you want put downward pressure house prices, the better place to look would be eliminating land tax, to encourage people to move to cheaper markets. This will also help regional unemployment.

The other place to look is discouraging two income families.

But reducing house prices would be a very bad thing for an economy. You would see an increase in bad debts and this will likely result in the collapse of the entire economy.

Zany:

08 Jul 2014 2:23:56pm

Supply and demand my dear ibast. Your logic is crazy to say the least. House prices will fall by at least 150thousand dollars re sydney Uni study . Besides negative gearing is just welfare as the LNP has stated many times. Welfare should go to those who need it not property pimps.

Zany:

Zany:

Ann:

08 Jul 2014 2:52:12pm

Haha, no Zany don't you get it? It's GOOD that new entrants can't afford a home. That means they have to rent one of your properties!

The young are just a bunch of ungrateful bludgers anyway, they deserve to be screwed over by the older generations, and this will never go badly. Young, poor, desperate people have never been known to take what they want by force. Never in human history!

PW:

07 Jul 2014 4:52:09pm

"Landlords back in 1998-99 managed to turn a combined profit of $700 million. On face value, the new ones who have jumped in appear to lack the same financial nous, as their losses stand at just under $8 billion."

Are you suggesting that all rental properties, Australia wide, lose $8b a year whereas 25 years ago they made $700m? That's what it seems to say.

The truth of the matter is that the loss of $8b is only from negative-geared rental properties, not all rental properties, the VAST majority of which make money and return tax to the Government. Negative geared properties become positive geared after a few years at most, and are owned outright after that.

If you are going to write articles on the subject, please do not print misleading information.

Mark Gailey:

07 Jul 2014 5:56:41pm

Not true. Many investment properties are financed on an interest-only basis and your assertion that "negative geared properties become positive after a few years at most" is incorrect and misleading. Even for principal & interest loans, it does not justify in any way that such investments should be subsidised by other taxpayers.

Edward:

08 Jul 2014 7:07:08am

You make an interesting point. As I understand it, one can only claim a deduction for interest if the intention of the investment is to eventually generate "taxable income", i.e. at some stage you must be able to show that the property will become positively geared. This raises thes the question of enforcement of the rules.

A simple solution to the whole issue is to only allow a deduction up to the income earned from the property and not allowing offsetting against other income.

One of the points that seems to be ignored by most proponents is that the landlord subsidises the tenant to a great extent - if rents reflected the actual costs then rentals would go through the roof. I think the article oversimplifies the issue and for me the greatest concern with this whole issue is people being overstretched and what will happen to them when interest rates eventually start to increase.

Geoff Ballard:

07 Jul 2014 5:09:05pm

Absolutely right! Negative gearing, together with historically low interest rates has resulted in distorted asset pricing - mostly in real estate. Whilst it appears to be rational it is in effect a Ponzi scheme as to succeed in the game requires ever increasing prices. How to wean the population at large off this property investment mania is the challenge.

First, I would suggest that negative gearing be watered down to only allow offsets to the extent of the income generated from the asset (after all other allowable deductions such as rates etc. have been deducted) - maybe such a policy could be phased in over a 2-3 year period to avoid sudden (downward) price adjustments.

Secondly, I would increase the % deposit requirement on the purchase of an investment property compared to owner occupation purchase and perhaps require a higher interest rate.

Thirdly, ensure that the Foreign Investment Review Board monitors overseas buying in accordance with the rules and ensure that the penalty regime for transgression is sufficiently onerous to engender compliance rather than the current free for all regime extant.

There are other reforms which could be implemented also but these are my first pick!

NWM:

07 Jul 2014 5:13:34pm

Just limit negative gearing to one property only per owner and for low to middle income earners only. The rich don't need it, and this will stop the abuse like my neighbour who owns 18 inner city houses that are rented out. Like all these schemes, it's the abuse that ruins it for everyone. And stop the rorts with family trusts and other instruments that people use to get around the system.

Trump:

07 Jul 2014 5:25:14pm

Negative gearing for residential property has inflated house prices as young couples and competing with developers.This is a scandal and no one seems to want to touch it, greed has out bid homemakers too many times in Australia and I hope one day we have a Govt with the guts to fix that.

Negative gearing should be for commercial and industrial property only and perhaps blocks of multi residential property developments but NOT single dwellings.

Ann:

08 Jul 2014 2:55:34pm

I've sent plenty of inquiries to real estate agents about opening days for new properties on the market only to be told it was bought "sight unseen"!

Guess what, a new home owner is NOT going to buy a property sight unseen! Only investors and speculators who care mainly for the land value or don't care if the place is a dump they rent to others do that.

So, we gave up even looking. The only places we can afford are two hours out of the city and would cost us as much in fuel per year as we saved anyway. ie, we still can't really afford them.

Charles Ponzi:

Any ideas for how we can encourage the government to scrap negative gearing for property speculators?

I fear it is now too late for reform and tighter fiscal regulation. The next financial crisis will force us to change whether we want to or not.

Household debt in Australia is at record highs. Interest rates are at record lows. Wages are falling or stagnating at best for most Australians. Youth unemployment is rapidly rising while baby boomers who can count are nervously saving for retirement that is fast approaching. We have a mining boom that is unwinding and an international currency war raging. It really doesn't look very promising despite a hot and frothy stock market that seems completely divorced from economic fundamentals.

Mark Gailey:

07 Jul 2014 5:30:54pm

You omitted to include the State Governments (who enjoy the increase tax income from stamp duty) and the print media (who rely on the real estate ads for revenue) who lobby on behalf of property investors along with the banks and real estate industry.

The Reserve Bank has lowered interest rates to record lows to stimulate the economy, offering housing loans for as little as 5%, yet the bank will not lend to small business for less than 8.5%, and then only with a mortgage over real property! The banks are just not playing ball with what the reserve bank is attempting to achieve.

The real estate lobby derailed Paul Keating by convincing Bob Hawke that rents would rise due to a shortage of housing stock. What rubbish, given that a stop to negative gearing will not make houses and apartments crumble and disappear. The housing stock will be just the same, but perhaps more will become owner-occupied. There are already incentives for investing in new properties through the 2% depreciation allowance.

It is incongruous that a young couple trying to get a roof over the head get no tax deduction for their interest payments, yet an investor can buy their 4th,5th or 6th property and can claim all their interest!

Perhaps as a start the government should allow the tax deductions only against the particular property for which the interest is applicable, and not allow it to offset against other income. The 50% discount on capital gains tax should also be scrapped.

These gearing and CGT benefits are part of the "age of entitlement" enjoyed by the wealthy, who have become the leaners, while the less well-off have become the lifters!

foolking:

07 Jul 2014 5:33:52pm

"..if you're paying more in bank interest than you're earning from your asset year after year - whether it's rent from property or dividends from shares - there's only one reason you're holding onto it, and that's capital gain".

The above statement is very hard to disagree with. And the ramifications for the country is the perfect groundwork foran open discussion stating objectives and alternatives for the stakeholders. No govt. in recent history has been able to pull this off ie; tackling the big issues, they require a disciplined opposition who's agenda isn't just destabilizing the incumbent.

However if rent collected can be shown to be low and in a housing shortage area some compense should be negotiated via tax

GrumpiSkeptic:

Negative Gearing seems to be the favourite of Mr. Michael Janda, as I saw quite a few of his articles on such issue within this few months. But that is fine as that is his job.

Yes, I am guilty as charged. I "DID" negatively geared my investment properties. No, I am not a high income earner, but merely an average one.

I faced the choice of seeing my hard-earned savings being eaten away by inflation. Whatever interest I received from the bank, the taxation department very quickly separated it from me! So I have some money that was peddling on the spot, going nowhere fast. Lets face it, time will catch up with you, and your employment can never be guaranteed.

It took me years of "umm.. and Ahhh..." to finally decided to plunge into the housing market. Yes, you guess it, I negatively geared. Now was that a promised path to paradise? Far from it. I skipped the fancy restaurants, flash new cars, etc. My fists were so tight that it took much persuasion to open up, ever so slightly. Contrary to some false imagination, the many years I took on such risk was far from being a champagne and caviar affair. Mind you, the interest rate then was at an all time high, 17%.

I pumped money into the investments despite negative gearing. Mind you, the constant worries about further interest rate hike did not help my raw nerves then.

Now, my investments no longer afford me any negative gearing benefits. If you care to know, there is one less pension receiver too.

It is a life choice. If you want to rent, and bugger with the other issues such as council rates, insurances, water and sewage rates, land tax, constant safety requirements such as smoke alarms, RCD's, and constant maintenance to keep the house liveable, then go for it. To paint people who chose to negatively gear in a pale light is quite far from the reality.

Tim P:

07 Jul 2014 8:07:04pm

You and I think alike.The bottom line is, when you expose yourself to investment property it's a huge financial risk. Interest rates are low now, but who knows where they'll be in a year? Last week's pay cheque may be in the bank but what about next week's?

Just one question: what are these 'fancy restaurants' of which you speak?

Zany:

GrumpiSkeptic:

08 Jul 2014 3:55:22pm

Tim P

I can't name names, neither do I know too many as I don't go near them. However, "fancy restaurants" I am referring to are the ones that serve you a meal in a super-size plate, but with the few peas and some garnishes sprinkled over a tiny piece of food in the centre. For all that, you are charged over $100.

jimbob:

07 Jul 2014 5:46:11pm

What a load of cobblers....another "jealousy" piece aimed at...well who knows who...another case of you're "nasty" because you have something I don't!

It's one thing to say that "x" number of people have investment properties and another to presume (quite ludicrously in the absence of sound data) that all or even just the majority of those properties are negatively geared.

What most writers on this lame duck topic never mention is the unbelievably high price of serviced land and the world leading cost of construction. Put a pinhole through my nose if you can find a 300 - 400 square metre serviced block in the Sydney basin much less than $300,000 and a junky project home (termite ready) for less than $200,000. And this is in the boondocks!

All these costs which put the cost of new home outside the reach of new home buyers have absolutely nothing to do with negative gearing. They are government taxes, servicing and construction costs all paid up before the first nappy is hung on the clothes line.

So some reality please. People get tax deductions for borrowing money to buy shares, franchises, businesses, to undertake capital works programs (I could go on indefinitely). Why is property investment (in new or old stock) some worse kind of economic activity? Dropping negative gearing won't make property any cheaper and personally I don't see too many Councils giving up developer contributions or CMFEU members halving their salaries for the sake of the "poor" first home buyers.....

Roger Tersheck:

Zany:

08 Jul 2014 8:38:26am

It's got everything to do with investment welfare. The market is overcrowded with property pimps and negative gearing welfare recipients thus stopping families from acquiring a home because of the inflated false market.

jimbob:

08 Jul 2014 10:59:29am

RT - you don't think that shortages in supply of housing stock may have something to do with homelessness? Maybe the government could provide housing for all - I'm not necessarily against it in principle. The only question will be how are we going to pay for it and what will be the social cost? Track record is not good to date

Zany - regardless of negative gearing, no one will build a house, if at the very minimum, they cannot cover the cost of labour and materials and imposed taxes and some profit on top. Have you hired any builders or trade's in Australia lately? There is much more to this inane debate than just tax breaks for investment.....

Mark Gailey:

07 Jul 2014 5:46:11pm

Forgot to mention in my previous post:

The government is concerned about Australia's declining fertility rates. Why would they be surprised when most young couples cannot afford to have children until they are in their 30's because of huge mortgage commitments and child-care payments (again caused by over-zealous government regulations)? The maternity-leave proposed is a clumsy and expensive means of making "baby-making" more affordable.

Governments continue to be duped by the real estate lobby, who are again calling for an increase in the first home owners subsidy. The fact is that this causes sellers to escalate home prices to get a share of the subsidy, and the real estate industry are in the cheer squad.

If the age of entitlement is to end, then sensible alternatives to the old chestnuts need to be implemented. I hope I have eluded to some points upon which the government should dwell as the young couples and hopeful owner occupiers are without a voice or a lobby group.

Not Such a Golden Oldie:

07 Jul 2014 5:58:41pm

Through the years this has grown into a diabolical problem, that will cause problems if it is fixed and continue and magnify problems while it continues to exist.Firstly I need to acknowledge that I have used negative gearing in the past and did not feel like I was rorting the system, while I was doing so, for a number of reasons. Firstly as a retired accountant I am accustomed to the idea that only NET profit is taxed in all businesses, not just the business of owning a property that is rented to a tenant. It is normal practice for a business person to borrow in order to finance the business and the interest paid is a normal expense of business. A second reason was that I needed to move from my house to rent in another area for combined work and private purposes and the negative gearing helped to pay my rent - I don't feel a bit guilty for that.Then why do I say it is a diabolical problem? Because it has undoubtedly contributed to two real problems that Australia faces now or will face in the future. The first is the undoubted inflation (bubble) in property prices that we now have and will cause problems if property prices stay over priced and also will cause problems if prices come down to a sustainable level. In addition young people are being priced out of the housing market and that is a social problem now and in the future.The second reason is one of distortion of the economy. Too much investment in property and insufficient in entrepreneurial businesses, which have a better multiplier effect in increasing general prosperity. In addition you have the problem that is referred to in the article, of interfering with the Reserve Bank's ability to use interest rate movements as a method of controlling the overall economy.Peter the Lawyer is right that changing the law to exclude rental property would be very difficult to draft and enact, without downsides to other businesses.In spite of the difficulties, I do think it is time to make changes because the longer they are delayed the worse will be the effect in the future. When we have the next major recession, which I believe is inevitable at some time in the future, perhaps precipitated by difficulties in the Chinese economy, a downward price shock in the property market, such as we experienced in the early 90's when property values declined by 20% to 30%, would seriously effect our banks left holding mortgages worth more than the current values of the properties - a re-run of the American property collapse. This would exacerbate any recession and could lead to a near collapse of the economy to rival what has happened in some European countries..I would suggest changes such as follows: Firstly a grandfather condition, secondly limiting negative gearing to newly built properties and thirdly removing John Howards change to Capital Gains tax to return the taxable rate to 100%. I would also advocate that inflation indexation should be allowed at the CPI inflation r

polony:

I agree with the criticism of our tax law, but some supporting statements are not correct.

1) "When lots of investors do it at the same time, that is a bubble."

No. Bubbles are when people buy just because the price is expected to increase, regardless of fundamentals.

Australian fundamentals are that, in the long term, Australian property is very expensive in comparison with foreign equivalents, BUT in the medium term our red tape and vested interests mean we have a shortage of property in some places.

2) "By itself, negatively geared property is clearly a bad investment - even though other taxpayers are subsidising your losses, you are still losing money."

No. If the capital growth when an investment is eventually sold exceeds the accumulated losses then it does not lose money.

If property price increases equal the inflation rate then the fact that property value increases while loan balances don't makes an average property investment very good, regardless of tax benefits.

An annual value growth rate slightly over the inflation rate is very conservative. Although property prices tend to increase in short bursts for a few years followed by several years of stagnation, detailed research can find areas and properties most likely to boom. This detailed research is far beyond just listening to salespeople after your money. The number of people interested in buying a home, not an investment, leads to market inefficiencies that enable some very attractive investments.

3) "while 23 per cent of households in the top-fifth of income earners have an investment property loan, only 11 per cent of households in the next highest income bracket"

You miss a better explanation for the relationship between income earning and investment.

Becoming wealthy needs the discipline to spend less than you earn, the discipline to learn a lot, the discipline to ignore your heart and ensure your ongoing investment decisions are optimal, AND the discipline to ignore investment advice from loved ones who are not wealthy.

A bit of discipline is needed to become middle class. For evidence, see the struggles of an apprentice earning far less than their friends.

A lot of discipline is needed to become and remain wealthy. Otherwise, people follow the advice of financially illiterate loved ones or listen to their heart instead of their brain or believe some salesperson's bulldust or waste too much of their wealth on luxuries/ 'friends'/ businesses without sustainable competitive advantages.

If wealthy people get wealthy because they have these disciplines, along with relevant knowledg

foolking:

07 Jul 2014 6:07:56pm

Someone commented the other day that the great Australian dream is to own a house ,not own a business like the US.

This is the point of difference that negative gearing has to take, if you live in it, it should be an advantage not a disadvantage. New houses as someone mentioned here, could still attract negative gearing.

AE:

Ann:

08 Jul 2014 3:04:03pm

Nah, there's subsidised low-wage housing in WA. Mostly low-income bogan families using it. And while there are some foreign students, I thought we were trying to court those because they put a lot of money into our universities? They can hardly sleep in the street while they study can they?

John:

07 Jul 2014 6:18:09pm

No one has bothered to figure out what the consequences of this great idea might be or even what they hope it to be beyond limiting tax deductions to some tall poppies. Now let's think about some other possible outcomes. Without negative gearing investors will be looking for a 5 to 7 % net return on investment. Ie $350000 townhouse returns $350 per week $18,200 year or 5.2% happy days. But wait the real estate agent gets $1547, rates and utilities gets $2000, body corporate costs take $3000 repairs and maintenance takes $1000, insurance takes another $400 so the investor receives $10,253 or just under 3% not good enough might as well put the money in the bank. So for the investor to get 6% return rent has to go up to or property values have to go down.For $10253 to be 6% the property value would need to fall to $170,883 it would not be just be investment property that falls it would be all property values. Try and sell that to existing home owners whose personal wealth has fallen if they own the property or are in default with their bankers if they have a loan. For $350,000 property to return net 6% rent would need to be $27434 per year or $525.57 per week.Note I haven't taken interest into account because now it doesn't count there is no tax benefit because some clown got rid of negative gearingThe building industry would be decimated. The housing market ie personal wealth would be decimated. The homeless would be increased. The banking system would be screwed from default loans.Good outcome eh.

Snapoutofit:

PW:

07 Jul 2014 7:53:36pm

You missed the biggie, John.

By making it impossible for new players to come in due to needing a huge deposit, a rental shortage would be created over a period of time, and it would bet worse and worse, until the same people here demanding NG be abolished start screaming on this very site that the Government must start building public housing. This would cost MUCH more than $4b a year, which in the scheme of things is a pittance to pay for the private sector to provide public housing, especially when the Government is raking off tens of billions from those properties not negatively geared.

Meanwhile, investors chased away from housing would look for some other investment, like self managed super funds, which is where the Government should have looked in the first place for savings. So not only does the Government have to build whole suburbs of new housing, it also loses much of the tax dollars from rental properties.

There is a reason Governments of all colours don't touch NG. It's because it's a goose that lays golden eggs.

a taxpayer:

C3PO:

07 Jul 2014 8:37:35pm

Some minor points are that renters usually pay the utilities and that body corporate fees reduces maintenance and the like. Another is that if you don't want to pay over-inflated agent fees, there are many opportunities to advertise yourself. Lastly, a home owner investor sees income both from renting out their property and from capital gains. Their rent might not gain 6%, but their property value will increase year on year.

However, the major issue is why housing policy should encourage real estate as investment as opposed to providing a basic need. You seem to believe that it is the responsibility of the government to ensure that you get a 6% return on your investment using taxpayer money. Maybe TA was right - there do seem to be some government lifters and leaners....

You neglect the vast majority of would be home owners - the people who want to actually live in their home. Apparently your right to a subsidised passive income is more important than the right for more first home buyers to enter the market and live in their own home.

Clownfish:

Charles:

07 Jul 2014 6:54:35pm

Michael Janda is suggesting we get rid of one of the fundamental principles of business which is you cannot tax inputs into a product or a service. If this is adopted then all production and industry would cease as there would be no gain for anyone producing a good or service. Consequently we would all be confined to just doing things for our own benefit because to buy or sell to anyone else would incur taxation that would remove any profit.

Capital gains are taxed on investment properties and this if applied effectively will remove any abuses of the system. There is no way to remove negative gearing without destabilising the taxation and business principles of this country, or any other. I don't understand how Michael Janda can overlook such a fundamental issue.

Charles:

08 Jul 2014 8:19:01am

NAREA, you are wrong, as you seem (like Michale Janda) unable to fathom one of the basic principles of the human activity of buying and selling. What do you think the outcome would be if you were to tax inputs as you and Michael Janda suggest? It would mean the price of every item would soar as every asset/product owner would have to try for a greater profit to pay their way. This would mean rents would rise, and concomitant with that also homelessness as low income and pensioners would be unable to afford the new rents.

As mentioned, home/property owners try to retrieve value from their investment via capital gains and if that is set correctly then all parties win. The idea that removal of negative gearing would end abuses of the system is a naive concept seemingly shared by only the Fairfax and ABC journalists in Australia and who are in direct conflict with every other (non Marxist/Socialist) nation on earth that this is a good idea.

If you want to rid yourself of excessively high property prices then you will need to remove local government as the high prices are merely a function of the tithes you have to pay to this political class in order to keep them in the lifestyle they have become accustomed to. They do this by artificially inflating the cost of land by restricting supply so they can charge taxes on that land via the delivery of supposed 'services'.

So, you (and Michael Janda) need to decide whether the benefits of local government are outweighed by the cost of land prices which they keep as high as possible to ensure they get enough money to do whatever it is they do. If you can change that dynamic then you might see property prices and homelessness at a level you are happy with.

AE:

SimonP38:

07 Jul 2014 7:01:41pm

A positively geared investment house is much better thatn an negatively geared investment house.

Investment housing greates housing for people who need/ want to rent. Most investors have are not beg capitalists but mums & dads who are working hard. Sacrificing a little to try to improve their lives.

If a company was set up to invest in retail houseing it could claim all of its outgoings on tax. -Negaitve gearing effectively puts the privatre investor on the same page as a a company.

If the country decided to abolish negative gearing it must take into acount two things.

1. abolishing negatrive gearing tomorrow will cause a hose price crash and a massive number of bankruptcies, therefore is can only be done slowly - say over 20 years reducing the % by 5% per year.

2. it must allpy to all retail housing and commercial property, otherwise the ability to claim imputs agaisnt profits will twist the market in fabour of corporations, make retail houseing attrcactive to OS predators without haveing a real effect o house prices.

Ravensclaw:

07 Jul 2014 7:25:36pm

While I agree with some of Mr Janda's arguments I disagree with his conclusions, at least in the current climate of the property market.

It is a sellers market for home buyers and investors with a property to rent. That is, there is insufficient housing for both home buyers and renters. This is what has primarily caused the massive increase in the cost of housing over the past 15 years.

People who invest in property do so in pursuit of a long term investment. Taxes and legal expenses make most short term property speculation not feasible.

Were the government to either suddenly or progressively abolish negative gearing the following would happen:1. Property Investors would look to sell. Other property investors would not be buying, so for the short term this would be a gain in cheaper prices for home buyers.2. Renters would be in a pickle. Housing for renters would dry up. Increased demand from renters + the sudden increase in net costs for the property investors that remain, would see rental prices skyrocket. Lease expiry evictions would skyrocket as investors could better justify higher rent increases to new tenants as opposed to existing tenants. What makes this even worse is that renters are a lot more economically vulnerable than home buyers with a mortgage.3. As the problem that started the surging cost of housing i.e. inadequate supply would still not be addressed, any advantage the home buyer would gain would only last until once again the demand for housing for home owners exceeds the supply available.

The best argument Mr Janda makes is this: "From that point of view, the big problem with this tax system is that it encourages excessive household borrowing, subsidised by the public purse, and going into an asset class that does nothing to add to the country's productivity or economic outlook."

And Mr Janda is right, this is a serious problem. However rather than target negative gearing, turn the market into a buyers market, both for renters and home owners. This will provide the market adjustment Mr Janda and I would want. And the best way to do that is for government to release larger amounts of land for housing development. And secondarily address any labour or housing materials shortages.

It now takes approx 30 years for an average family to pay off a home loan. In that time most families would experience on average 2 economic downturns. If that downturn affects them in such a way that they lose their property, they may not have enough time to recover financially and establish a new loan.

So please don't beat around the bush with red herrings i.e. negative gearing. Nip the problem in the bud, and tackle it at its source i.e. insufficient supply.

rob:

07 Jul 2014 7:27:22pm

Negative gearing has had minimum impact on recent house prices.If you study the housing market history you will find that home price escalation has been a relative recent given that negative gearing has been in place for many years.Blame government housing grants, slow release of land not matching population increase and local councils outlandish regulations and fees to fund their ever expanding social programs.Another factor is the real estate sales industry pumping up the market via their medium price myth.House building costs are relatively low in Australia and if you want to see expensive housing in Australia just get the Labor sponsored building unions involved in domestic housing.

Philosoraptor:

07 Jul 2014 7:28:11pm

I think this problem is far bigger than just negative gearing in Australia. The problem that there is a massive glut of savings in the world (Chinese people saving half of what they earn) that has allowed for otherwise responsible people to take those savings and waste them bidding up the price of real estate. That is what is allowing us to borrow at 5 percent, Imagine what the interest rate would be in this country if we had to finance our own real estate 18-19 percent because as a country we have no savings.

There are a lot of stories used to justify the increases in real estate but private debt going from 20 percent to 150 percent of GDP and 1.2 trillion Dallors of debt is the prime mover. If the liquidity dries up the speculators can no longer imagine a great return on their assets then the game is over and bubble pops. While some people might think they want this and yes while it might make for an interesting headline and the chance to say I told you so it will do nothing for the economy. Nor will it help you buy a house as it would lead to serious recession.

We need to find a way keep housing rising just below inflation while encouraging businesses and other productive sectors to take out loans. At the very least we need to change our property mad culture that thinks to be rich all you have to do is borrow money and buy houses to one that rewards sacrifice, hard work and saving instead of punishing it

phantomm:

07 Jul 2014 7:29:21pm

If negative gearing was abolished, investors will do the only thing they can to keep their money.They will sell all their properties.This will create a glut in the housing market, causing house prices to drop. Many people, ordinary mum and dad home owners will suddenly find that their houses are now worth less than they paid, or, worse still, they will find they have loans that are worth more than their house, so even if they sold, they would still owe the banks for the balance of their loans. This means that these homeowners will have to pay off their loans first, before trying to purchase another home.

Since houses will be cheaper, many renters will start to buy houses, causing rentals to fall for the investors.

New investors will not buy houses to rent, since the rent still won't cover their loans plus they can't negative gear.

The winners here will be the banks, although I suspect that the number of loan defaulters may increase significantly.

The losses to the investors will create a massive amount of money being claimed as a business loss and the Tax dept will lose a lot more revenue than negative gearing would.

Not to mention the financial turmoil to other investment avenues, since there will be a lot less people with money to invest in shares etc.

Leave it the way it is. It may appear unfair to some, but the consequences of abolishing it would require a new raft of laws and taxation rules that we don't need now.

Philosoraptor:

08 Jul 2014 8:31:15am

I doubt anyone would a repeal of NG retroactive for the very reasons you outline above. The banks would not be winners pretty much all they do is lend for housing and they are dangerously positioned at the moment this is from a piece by Chris Joye "This has ramifications for home owners and investors in the banks, which are, on average, leveraged 25 times and only need a circa 5 per cent fall in the value of the assets held on their balance sheets ? 60 per cent of which are home loans ? to have their equity capital wiped out".

Remember this is an a academic exercise they would never allow anything to spook the property market because if it did people would begin to think that 600,000 on a one bedroom out of town flat might not be reasonable. that price has within it a euphoric expectation of the potential earning power of the asset and once people can't imagine boom time growth it's value will collapse. I went into a viewing yesterday where the rental yield was estimated at 480 a week and the offers were over 700,000 everyone must be expecting the capital gains as that is serious negative income. I just think this asset is so overpriced why should this asset have any capital gain? I think negative gearing allows people to justify bring overpriced real estate

Mark R:

08 Jul 2014 1:26:40pm

"If negative gearing was abolished, investors will do the only thing they can to keep their money.They will sell all their properties.This will create a glut in the housing market, causing house prices to drop"

good!! then the first home buyers could get into the market for less than 500k and $600 a week mortgage payments..

JAL:

07 Jul 2014 7:42:33pm

The whole reason that negative gearing for residential real estate come about was the recognition by the Government of the day that houses need to be built and shelter is one of the basic needs of people and one of the few areas that Governments should be involved.

So it is completely disingenuous to talk about the costs of negative gearing to the taxpayer without at least estimating the cost to Government if it was stopped. In other words the Government has to provide the resources to build new houses for renters.

Using the figures in this article this could be as much as $15 billion as negative gearing represents a benefit of around 30% to investors or in other words a saving of 70% of the cost of housing to the Government. It is wrong to say that the Government is subsidising investment, its is the investor that is subsidising the government in the hope that the long term benefit is worth it while the Government gets the short term benefit of redirecting tax money into other areas like health and education much more important to the nation over the long term then the Government owning houses.

Sure talk about making it more targeted, like for instance only allow new houses to be negatively geared or certain types of schemes or developments that qualify for negative gearing.

But if the concern is primarily about negative gearing fueling of price inflation in residential housing (something that is an issue) then there are other things a Government can do like streamline housing approvals, release more cheap land and/or rezone areas as required, restrict foreign investment (in residential not commercial investments) and not let there be a constant land shortage which is the real reason for spiralling house prices. Wages are also a major contributor to house price rises as the majority of a cost of a new house is the labour to build it.

Also from business point of view it is very rare that there are opportunities to buy income producing assets, whether they are businesses, shares or real estate that are not fully priced and the value is based on current earnings and not the projected future earnings.

The holy grail for any business or investor is to acquire something valued on current earnings with no future earning factored into its price (ie less than market value), however the truth is 95% of all acquisitions are made on prediction of future income and the price of the asset priced accordingly.

That is the price paid for most assets is not based on any present income but on some future projected income and therefore the value comes down to what the seller and the buyer believes what that future income potential is going be.

In this situation debt allows the buyer to purchase something using todays dollars in the hope that in the future the income will increase enough to justify the purchase price and repay the debt out of cash flow and eventually owning

Rayofadelaide:

07 Jul 2014 8:03:06pm

As i understand it, NG (Negative Gearing) is subsidized by Tax offsets against taxable income. With the changes in capital gains tax, the losses from NG properties DO NOT HURT the well off, since they have the wealth to "bide" their time and wait while the property value climbs to a point where they might sell it. When they sell the CGT is less (thanks to J. Howard) and so the loses they had incurred is less then the value gained (TADA Profit).

It is this I believe where the rich get richer!

A good eg, i buy an asset for say $200k and "rent" it out an make a loss of say $20K. NG gives back to me 75% of my loses against my taxable income in the year i rent it out, but the if value has increased by $40K, my ROI (if sold) is more than the loss.

FlapDoodle:

07 Jul 2014 8:06:03pm

The Government is averse to axing negative gearing for its selected few. Paradoxically, that same Government talks endlessly of levelling the playing field, ending the age of entitlement, waffle, waffle waffle.......What about a different approach - let us all have full access to all entitlements e.g. negative gearing for all investments, private or commercial, and additionally, authorise investors to charge advisors/real estate agents etc. upfront and trailing fees for bringing their financial and other asset management business to them. Under current arrangements our investment capital is undervalued by the parasitic advisory industry ? real estate and financial.Extend the rorts - no never, I hear you cry! In line with true Conservative values (a la Margaret Thatcher) we can all be raised to the nirvana of faster and larger property ownership and capital accumulation. Surely the Government would find that it would stimulate the economy through the development of new, innovative and taxable finance/asset bubbles in parasitic non-productive sectors of the economy. We do not have to add value to anything others would find worth buying or trading. We would be entirely self-sufficient.

Zany:

fed up senior:

07 Jul 2014 8:17:58pm

Perhaps one of the worst aspects of negative gearing is that such a high percentage of personal savings goes into residential property, which is a non-productive asset, instead of Australian businesses. the result we have some of the highest cost property in the developed world and Australian business is starved of capital. It has been a blight on the economy for decades and should be abolished

ltfc1:

07 Jul 2014 9:07:45pm

Seems to me there's a growing number of individuals who oppose negative gearing because it's wrong for people to use taxpayers money for profit. It's OK for people to sit on their backsides and claim welfare of all kinds and never create anything for anyone but let's not criticize them because they are the underclass. If all the investors revert to a user pays system without subsidy what do you think would happen to all those properties and tenants? Well many of them would simply raise the rent to a level whereby nobody could afford to rent and tenants would end up on the street screaming at the government and investors for a fair go. Many would sell their investment properties which could cause a drop in house prices but this could cause the economy to fall into a hole. As for the political comments coming from the socialist, left wing lobby groups and anti business, anti homeowner, anti make a success of yourself tribe, why don't you move to a country that fits your picture of life. Most of them are broke, massive unemployment, sub standard housing accommodation and the list goes on. I don't own any property except the one I'm trying to pay off but god help us all if these people with an agenda ever get control.

Zetetic:

08 Jul 2014 11:42:13am

If they landlords raise the rent so no one can afford to rent...then who will pay the rent? landlords can only charge what people are willing to pay and if there are no wage rises then there will be no increase in rents. never has been never will be. If investers are then foprced to sell their properties who will they sell to? if all investers put their properties ont he market what will happen to the prices? prices will fall and renters will buy them. net effect is a renter will become a home owner because the price of houses is now closer to the cost of renting. A great outcome don't you think?

Sell now before it's too late. Rent a place that someone is paying more in a mortgage than you give them in rent and wait for the prices to drop. you will then be able to buy back your old house at a 40% discount.

Albie:

07 Jul 2014 9:10:07pm

If you sell an investment property you are required to pay capital gains tax - if neg gearing is abolished then on sale of the property every cost associated with the property over the term of ownership would be taken out in one lump sum instead of annually. The cost of doing business is always taken out of tax paid. Without NG the main effect is that there would be less properties for rent and less new properties being built by investors. That's why Keating brought back neg gearing five minutes after he abolished it.

Greg:

I don't think you should get rid of negative gearing. Its no different than claiming any other form of expense.However, getting rid of the capital gains discount would work and discourage speculation.

The tax system definitely needs looking at. Say you are on the highest tax bracket (now ~50%) and you have cash in the bank earning ~4.5% interest, you will pay the govt 2.25% and the other 2.25% (or maybe more) will be eroded through inflation.

A:

When the principal purpose of a scheme is to obtain a tax benefit, as opposed to taxable income, the tax benefit is supposed to be struck out under the tax provision, the so-called Part IVA.

It confounds me why the ATO is ignoring the obvious arrangement in negative gearing that is all about deliberately incurring a net loss to offset against other income and gain the tax benefit by this means in order to help fund a later capital gain (which although taxable, is still not income for the purposes of assessing whether Part IVA shall apply).

Has the ATO been told by politicians to lay off property investments (as the RBA has in my firm view been told)?

Toto:

07 Jul 2014 10:03:48pm

The problems which are shown are very clear and we can see though it can make interest, finally we will pay back. But it is rare to see what is the situation. Yes, absolutely, there are a few ways to deal with these problems which were given by many people. Some seem great, some seem just like a joke. Now this society needs a solution actually we can do and can make some effects on the situation. And the situation in Australia also can be seen in many countries, maybe governments can make cooperation and face these problems together.

coaster:

07 Jul 2014 11:17:06pm

It has long been my view as an ex-investor that all home buyers should be able to use negative gearing to purchase a home,be it investment or own residence, just as they are able to in other areas of investment.The rub would be that any property purchased using the expense deductables would attract CGT when sold, thus enabling more First Home-owners into the market and discouraging onselling.Not a perfect scenario but it is worth a thought.

Farside:

08 Jul 2014 12:47:12am

Yawn....More drivel, whining and whinging from the socialists and communists who would rather peg everyone to the lowest societal denominator and who squarely begrudge anyone who dares excel be it through bloody hard work or simple good fortune....Here's a news flash, it would be a safe bet that the number of negatively geared investment properties owed by evil greedy business types is probably less than that owned by the mum and dad investors or the poor down trodden "workers" that the left parrot on about at every opportunity.......The property portfolios of the CSG and Mining "workers" in Qld and WA (not to mention the wharfies around the country) would put that held by most business owners to shame but don't let thing like that get in the way of your red rag propaganda.

Greg:

08 Jul 2014 12:56:08am

If any incumbent government were to abolish negative gearing it will cause a landslide in property prices due to the mass exodus of investors currently in the market due to their inability to absorb the increase in holding costs.

Once the number of available rental properties is reduced the State Governments and ultimately the Federal Government will have to supply state / federal housing as the private investor supply will be massively reduced.

The state and federal governments are not in the financial positions to be able to afford this extra burden without raising additional taxes.

Current rental prices will also be increased to offset the loss of expenses claims and we would most likely see an increase in the rate of crime.

Like it or not, We do not have enough housing to home the countries population and the state and federal governments cannot provide it either.

Philosoraptor:

08 Jul 2014 7:57:03am

I think the best idea is ban negative gearing for existing property with a grandfather clause for current investors then bring it back to apply for new housing only, that would avoid the problem you talked about right?

Spockter:

08 Jul 2014 1:12:40am

What I don't think makes sense is how states taxes such as land tax are tax deductible in income declared to the Federal Government. Why should tax payable to the Federal Government be reduced by taxes paid to the State Government? Same thing applies to Stamp Duty which becomes part of the cost base and reduces capital gains tax payable.

Removing such anomalies would make real estate investment less attractive as a tax minimisation strategy.

Forrest Gardener:

08 Jul 2014 2:32:26am

Quote: Usually only featuring in public debate in its real estate context, the ability to write of interest payments against other income is not just available to property investors, but also to shareholders, businesses and other investors.

The general principles of taxation are that profits (income less expenses) are taxed, income and expenses from multiple activities can be pooled, and losses from any year can be carried forward.

The term "negative gearing" simply means that for the early part of the ownership of the asset, income is less than expense.

Commenters would do well to think things through before engaging in rage against the capitalist machine.

Chris O'Neill:

08 Jul 2014 4:07:30am

"It's probably no coincidence that the big surge in investment loans came in the late 1990s, around the time the Howard government changed Capital Gains Tax rules to institute a flat 50 per cent discount"

No. The big surge occurred mainly before the change to the capital gains tax rule on the 21st September, 1999.

lovewhiteboats:

08 Jul 2014 7:34:42am

Wow, this has really become a huge class war blog...left vs. right, poor vs.rich. At least there are a few sane comments - I dips me lid to you Janice for your hard work and sensible replies. ltfc1 is also bang on the money. Why should people who work their behind's off to get ahead to avoid being a drain on the public purse be reviled by many on this forum who are likely receiving government welfare in some form or another. Remember, dont throw stones in glass houses.

To all of the downtrodden poor baying for the end of negative gearing and the delight they will have when house prices crash....dont you realise that capital gains work both ways. If thousands of investors make huge losses, this is also tax deductable as capital losses carried forward , so "you" will be paying for this anyway.

Stephen W S:

You can get ahead without negative gearing and other government handouts. My wife and I have done it and achieved wealth without relying on government handouts of any kind.

It is hypocrisy to cheer about Centrelink benefit cuts while bemoaning anyone wanting to suggest cutting government welfare benefits for negative gearing users. Remember what is good for the goose is also good for the gander.

The unthinking well off always seem to resent parting with the hard earned in tax but love making record profits for the banks by paying interest. Why it is better to give money to the banks when you get nothing back from the bank unless you are a shareholder I do not know. At least all of us get to use roads, hospitals, schools, airports, ambulances, police and fire services if we need them all of which are are provided to our society via governments and funded by taxes paid by those responsible enough to pay them.

Hockeydonian:

coaster:

08 Jul 2014 7:39:24am

In the above example there would be no income, except the possible rent value calculation,but as an owner occupier the purchase would not have to be with intent of a capital gain.It is the issue of First Home buyers being assisted into home ownership by the tax deductables and then encouraged to keep the home by CGT penalties on sale.What the end result of this model would be is up for debate.What is known is that this model is actually readily available to anyone who bothers to gather the nescessary knowledge and get outside the square

Ian:

08 Jul 2014 9:42:13am

Leon, investment properties are not a short time deal, it takes many years to return any reasonable sort of profit. This is to say that if you institute a grandfather strategy today, people will stop investing today. Over the following years, rental property availability will reduce and those that are available will cost more as people increase rents to cover their expenses and demand increases. Good luck trying to save for a home deposit if that happens. Most young people are going to be stuck living with their parents for many years (if they want to own a home) or be locked into the rental market for life.

Huboo:

08 Jul 2014 7:57:02am

There are many requests above for suggestions of a solution to this issue. Here's one to start a discussion.

Remove the ability to offset investment losses against personal incomes. Allow the losses from investments to carry forward into future years of positive income rather than come off an individual's tax liability today.

Property investment is one of the few investments where it is done primarily not to generate an immediate income and profit. If you buy a business you expect to work in it and live off it's proceeds from day one, whereas property investment only generates tax deductions in the short to medium term.

Speculative investors would then think twice about their reduction in income today, personally making up in whole their immediate investment shortfalls.

Judas:

Negative gearing needs to stop if we want our children and grandchildren to own a home or 2 bed. unit/flat !

It is only the rich who can afford such outlay/tax breaks. Our wealth is not shared as it should be. Too many rorts by the rich.

I can see tho that many rich people prefer to put their money into bricks & mortar as Superannuation funds often do not do well and lose hundreds of thousands of bucks. What we need is an upgraded Superannuation situation - say like a Pension Fund in Canada and other countries where they have just about cut out old age pensions being provided by taxpayers. Their pension funds buy freeways, hospitals, large infrastructure even bought the port of Brisbane I believe which keeps earning money and not reliant on the stock exchange.

Keating got it right 20 yrs ago saying Super of 15% is necessary I'd put it at 17% to cater your retirement - perhaps 12% employer 5% by worker. Might mean a home of only 21 sqs. instead of 35 but more equitable in the long run.

What good is it doing Australia to sell off our homes and land to overseas investors who have never paid 1c in tax ?

Stephen W S:

08 Jul 2014 8:39:04am

I am a trained accountant who in my career worked both in the private sector and for the ATO as a senior tax auditor. I can understand the attractiveness of negative gearing on a purely superficial level of minimising tax paid on income earned. However, I have never understood why an individual would want to set out to make a deliberate loss on an investment. Please do not confuse buying one or two properties and renting them out with actually carrying on a business.

If you are in business your intention is to make a profit rather than lose your capital that you invested in it. However, entering into negatively geared property, or indeed any other negatively geared investment such as shares etc. is based upon the premise that you will make a loss and then get a tax saving but hopefully the tax planned loss will be offset or exceeded by capital gains on the investment. Once upon a time when property and share markets were a bit less volatile the prospect of steady but small, 5% to 10% capital gains was good and over a long time say 20 or so years such a strategy could put you ahead. The main reason for this was that once upon a time capital gains were tax free.

The reality today is that the property and share markets are much more susceptible to volatility, e.g. the property crashes in USA and Europe after the GFC are good examples of what can happen in our more international "investment" game today. In Australia there have been properly crashes of 5% to 10%, referred to as corrections but we have have much larger crashes, 1990 property bubble busting comes to mind. The prospect of a 20% or higher "correction" in property values must be factored in to sound investment plans. The truth is though most unsophisticated property investors over invest and over gear and leave themselves at risk of bankruptcy if such a correction occurs. The tax refunds will not save them when the bank calls in margin loans on share investments or repossesses the properties if in arrears.

Why did the government allow negative gearing? Basically, to help banks and property developers as well as allowing the wealthy sophisticated investors to minimise tax. Should it continue? If the budget is really in crisis the answer is no. However, because property values underpin so much of the household debt and commercial debt any reform must be gradual say over 10 to 20 years to avoid over stressing the economy. Any budget crisis that exists took a long time to eventuate after decades of vote buying largesse and so needs to be corrected over a long time. Sudden cuts to negative gearing or other "entitlements" are too dangerous.

Edward:

08 Jul 2014 11:10:48am

I don't think that you can overlook the argument that negative gearing has a benefit of providing a private rental stock. Without this private rental market there would be a huge demand on the public purse to provide affordable accommodation for lower income earners. Of course this would be a State problem if negative gearing were to be unwound.

Andrew of Morningside:

08 Jul 2014 8:40:33am

Michael, a bit simplistic:

Do away with negative gearing and rents will rise (due to the stopping of investment in housing stock) hurting the vulnerable, the effect on the budget bottom line will be nothing like the saving of the foregone tax, as without negative gearing people will make other choices regarding the investments, you say this yourself.

Do away with Negative gearing and house prices will not necessarily fall, indeed after a period of stability the reduction in stock will mean an absolute rise in price.

Meanwhile the trades sector will suffer a downturn, many small businesses, eg plumbers and carpenters etc, well they will be looking for work, which will cost the country money, and they won't be paying tax, which will cost the country money, and of course state/local government will need topping up because their stamp duty receipts and rates and land taxes and the like will be drying up.

Like most things in life Michael, its not simple, its not black and white and the possible consequences to single policy decisions are wide and varied.

Mark James:

08 Jul 2014 8:49:23am

How unsurprising that the current government only wheels out its user-pays rhetoric for the poor and the sick, but not for the rich.

When it comes to investment in our people and the future by way of education and health, we're told the age of entitlement is over and that individuals should be expected to pay their own way regardless of their circumstances.

However, when it comes to rich people investing in unproductive property, there is a deafening silence as the Coalition continues to divert public money into private purses.

David:

08 Jul 2014 8:52:28am

You cannot have it both ways, the Govt; ALP and Coalition, and numerous economists,analysts etc called for alternatives to drive the economy in the wake of the mining construction boom end. If half of all property sales and construction is due to investors then without negative gearing this number would halve, employment would drop, homelessness increase etc.

Negative gearing as many comments have indicated occurs in all sectors of the economy and society, R&D, exploration are all opportunities to negatively gear, do we stop research too?

Amaqzed:

Neither individuals nor trusts should be allowed to be residential landlords. If they wish to undertake these activities they can set up businesses to do so.

I do not intend to explain how this will change the dynamics of this particular activity (being a landlord) other than to say that IT IS A BUSINESS and should be treated as such and be ruled by the economics of a business.

kwensee:

08 Jul 2014 9:22:50am

Negative Gearing is the worst kind of poverty creator. If anything creates pockets of wealth and a larger class of forever-poor, it's this terrible tax concept of negative gearing. Why in the world should losses on additional houses be tax deductible? That was never going to be fair.The concept should be grandfathered. That means you either write a law saying that in 30 years from now, the negative gearing system will simply cease to exist. Or, you grandfather it by winding it down, for example, decrease the "benefit" of it by say 5 or 10% a year, progressively, until the benefit becomes zero. I don't care if people want to buy extra houses, but it should NEVER have been something they could bill the taxpayer for. That's upper middle class welfare. It's pathetic that people on high income hold their handout for what is essentially "wealthy man's centrelink assistance".

Jack:

08 Jul 2014 10:09:15am

The RBA may well be right in saying that negative gearing tax treatment is more generous than in other countries, but unlike the USA / Holland etc it does not apply to owner occupied properties. Keating clearly wanted to erase it, but had his moment on the road to Damascus and shed his opposition to it.

I well remember the discussions at the time, and although later analysts tend to dismiss the impact on available housing stocks, that was not the popular opinion at the time. Given that most of us were paying 17% mortgage interest at the time, one could justifiably be enraged at the then government's inability to run a hen house.

If the general ( and peer reviewed ) view is that tax deductability on other income be banned, then go right ahead. Capital is very mobile and it would be nice for my kids to have available a collapse in house prices. But I think that might well not impress home owners. Who I think constitute more than 1.9 million.

micka:

08 Jul 2014 10:09:36am

Interest on a housing investment loan is a business expense. If we single out interest paid as an expense that cannot be offset against income, why would we not prohibit other expenses like maintenance or real estate management fees or accounting fees associated with an investment property? What is it about an investment in real estate that so excites attention. It can't be that only the rich benefit from being able to offset interest against income because, as Judith Sloan shows in The Australian this morning, people of modest incomes also invest in property. And what of the unintended consequences of prohibiting the offsetting of interest paid, such as rising rents and a decline in rental properties - which is exactly what happened when negative gearing was last prohibited.

Jack:

08 Jul 2014 10:16:33am

By the way, I only know two investors in negative gearing. One is a carpenter who lives in my apartment block and purchases and upgrades apartments for a living. Somehow he doesn't seem to be a rolls royce riding investor - just a normal hard working guy.

The second was a shop steward in the Company I worked for some years ago. He owned 4 properties in Footscray. Quite where he was funding those properties from was a mystery we could not unravel.

mr2005:

08 Jul 2014 11:12:15am

As a beneficiary of the great negative gearing tax rort, I think it is a grotesque form of welfare for the well off. The bigger social issue is the burden it places on those who cannot afford the artificially inflated housing prices and end up in the rental spiral, paying ever increasing rents to pay off the ever rising (but tax deductible) debts of the wealthy.

Chris :

08 Jul 2014 11:12:35am

Reading through your article I was nodding to myself. I am a middle income proprty investor with an interest only loan. So far I am ahead as I bought 6 years ago and SHOULD HAVE sold 3 years ago as values are now back to what they were then after the ridiculous increases that occurred in the market. During that time maintenance costs have given me a hit and I am solely relying on Capital Gains as I have no intention of paying the investment loan off. In my way I probably have contributed to the rise in property values which in turn will only affect my own children. My intent was to help lower my mortgage in order to help them further down the track. A vicious cycle indeed. I am forever confused with the varying opinionions of the market improving versus the bubble pop to come. Should I sell, hold on. I have absolutely NO idea.

Kontrarian77:

08 Jul 2014 12:03:18pm

Abolish negative gearing - this would pull the floor out from under those who speculate in real estate. The flow on effect would be lower house prices, enabling genuine home owners an opportunity to purchase at affordable level.

Jayel:

08 Jul 2014 12:11:42pm

If you accept there needs to be houses, or accommodation of some sort, available for people to rent, somebody has to build them, some one has to pay for them. Do you think the Government, with you taxes, should build a series of high rise flats to house people, they do overseas, that what you want?The alternative is to get people, companies to build units, houses. For people or companies to put their own money up front, at risk and to do that there needs to be rewards for the investment. It can be high rents or it can be tax deductiblility for the investors, which is the lesser for the renters, I suggest it is the tax deductible road, you may think different.

MN:

08 Jul 2014 12:14:51pm

In order to quell the noise over us vs them (investors vs owners) why not let first home buyers deduct interest on their home purchases? Deductible interest for all but the trade-off would be no main residence CGT exemption i.e. on sale the home is subject to the same CGT as an investor would be. Restricting it to first home buyers would provide a leg up for them but would not affect those already owning property. I'm no expert but it seems reasonable to me.

Amethyst:

08 Jul 2014 12:44:02pm

Australians are blindly fixated on the right to own a home. Yes, it's become less affordable but, so what? It's not a right and you can live your life renting a property. Let's just accept the fact that most of use won't actually own a home and move on instead of whining about it.

Steve_C:

08 Jul 2014 12:56:04pm

I'm reminded of the younger work colleagues I've known through the 1990's and early noughties who were first gen Aussies; who's parents came from places where ownership of a house (let alone more than one!!) was (as I was constantly being told) "nigh on near impossible"... so, the ability/opportunity/chance handed to them on a platter here in Australia to "buy one, then borrow against it to buy another, then use those two to buy a first home for one of the kids and negative gear the lot" was just too good to be true as far as so many new arrivals from countries where such opportunities would never arise were concerned.

Meanwhile; I was left to wonder how long it would be before the whole thing went belly-up... just like seagulls do when they guts themselves to death on a feast that's so rich and abundant that they just can't recognise the damage they're doing to themselves by gutsing themselves to death. "How"; I asked myself, "could a single earner in garbage collection for a local council", for instance... "afford to buy three or more properties, and even with negative gearing, keep up the repayments? Surely at some point the back has got to break, and just like a house of cards, once the first card goes the rest will inevitably tumble down."

Here we are in 2014... If them cards are a gonna tumble, they're not showing any signs of tumbling just yet - maybe because a whole pile of Asian foreigners have jumped on in to save the bacon of those who've overextended themselves... but, I'd bet London to a brick that there's not enough Chinese investors out there to save every overextended local purchaser's butts from bringing the house of cards down eventually.

Just like the results of using a certain brand of shampoo; "it won't happen overnight; but, it weel happin!!"

Reg:

08 Jul 2014 1:20:29pm

If the interest rate on HECS is to be raised to commercial levels then why is it not deductible?

Not all interest is deductible. For example, the interest on owner-occupied housing is not. But that is because the ?income? from owner-occupied housing is not assessable. You?re not assessed on the rent equivalent of living in your own home.

But HECS debt is incurred primarily for the purpose of attaining assessable income. Students incur debt because they expect it to increase their income earning capacity, income that will be subject to tax.

Years of (arbitrary) case law have determined that educational expenses are not deductible except when incurred by employers on behalf their employees. But that has always been anomalous.

If HECS is to be ?commercial? then surely one or the other ought to be adjusted. Either it should be made deductible, or the rate should be adjusted to reflect the fact that it is not.

Soothsayer:

omegaeconomics:

08 Jul 2014 1:23:04pm

I disbelieve virtually everything the RBA and LNP say on housing - knowing their policies will always favour the wealthy, ie the only easy way to get acquire property - is to already own a property. This is because as interest rates fall (LNP/ bankers love rent seeking through easy fiat credit creation), equity rises on existing properties - allowing one to further rent-seek, and buy an additional property. The consequences:

The rich get richer;Rent seekers trump producers;The young are locked out of ownership - impoverishing them;A nascent middle-class is prevented from growing;Old money and rent-seeking trump education and wealth creation.

This of course leads to general social impoverishment for the many - just so the few can profit/ rent-seek.

Kyle:

08 Jul 2014 2:13:04pm

Good article. Well thought out and written.

I own one property. Due to the way that the tax laws work, I am better off renting that property out and renting from someone else, even at the exact same price. Apart from anything else, that is an odd result.

firthy:

08 Jul 2014 2:32:04pm

I cannot disagree with anything the author has said here. I would note this though - if one removes negative gearing house prices will stagnate or fall (at least initially). Now that affects anyone with a mortgage no matter whether that is a mortgage over the family home or an investment property. I don't note this point to support negative gearing but more to state that if we are to remove it (and the author make a good argument for doing so) we would be best doing so gradually in order to reduce any short term nastiness. As an example of how not to do these things look at the Rudd governments announced FBT changes before last years election. From a policy perspective they were sound enough but they should have been phased in in order to avoid the problems that actually arose.

Mykael:

08 Jul 2014 3:11:25pm

You may want to have a rethink about your reasons for negative gearing. According to the finance investors we can pay off our 30 year mortgage in less than 15 if we get a negatively geared investment property. Then we can pay the property off in less than 10. 25 years to own 2 properties vs 30 to own one - and all without significantly increasing our day to day expenses.

Given the legal uncertainties over super it's a wise investment...it'll either pay for our retirement or give our kids somewhere to live.

Swissbob:

08 Jul 2014 3:50:54pm

Interesting article.

I do not see a problem with negative gearing per se but it has created the conditions for property speculation. This is the main issue. I have profited well over the years from negative gearing and capital gains tax exemption from the primary home.

What are the solutions? The Swiss system is one option which is not so bad. Basically all properties (investor and owner occupied) are subject to capital gains tax on a sliding scale depending how long you have owned them, all costs for the property are tax deductable (maintenance, council rates and interest ect) this is offset against an imputed rental value for owner occupiers and stays the same for rental properties. In addition there is a small wealth tax (0.02% or something) which also forms the basis for means testing other social services such as childcare. So in effect it allows lower income families to access the home market by reducing the costs for home ownership but taxes capital gains heavily on all properties to stop short term speculation and fund these deductions. Not perfect but a bit more equitable.

Cabinetlunchtime:

08 Jul 2014 3:51:55pm

Or we could have banks become land lords. The same banks who can keep house prices higher by being underwritten by the government. It's a shame the bank can borrow more cheaply with this underwriting while the taxpayers aren't getting paid to carry the risk.

Hieu:

08 Jul 2014 4:23:28pm

I purchased an investment property about 10 years (within 5 km of a major capital city). That was my fifth one. All five are now positive geared. I also negatively geared into the share market, 2008 to 2009, into blue-chip shares such as CBA, WBC, SYD, WOW... to name a few. Maybe, I was lucky...